<PAGE>

                UNITED STATES SECURITIES AND EXCHANGE COMMISSION

                              WASHINGTON, DC 20549
                            ------------------------

                                   FORM 10-K
[X]             ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                      THE SECURITIES EXCHANGE ACT OF 1934
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
                                       OR
[ ]           TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                      THE SECURITIES EXCHANGE ACT OF 1934
              FOR THE TRANSITION PERIOD FROM          TO

<Table>
<Caption>
COMMISSION       REGISTRANT; STATE OF INCORPORATION;          IRS EMPLOYER
FILE NUMBER         ADDRESS; AND TELEPHONE NUMBER          IDENTIFICATION NO.
-----------      -----------------------------------       ------------------
<S>          <C>                                           <C>
1-9513       CMS Energy Corporation                        38-2726431
             (A Michigan Corporation)
             One Energy Plaza, Jackson, Michigan 49201
             (517) 788-0550

1-5611       Consumers Energy Company                      38-0442310
             (A Michigan Corporation)
             One Energy Plaza, Jackson, Michigan 49201
             (517) 788-0550
</Table>

Securities registered pursuant to Section 12(b) of the Act:

<Table>
<Caption>
                                                                                       NAME OF EACH EXCHANGE
REGISTRANT                                     TITLE OF CLASS                           ON WHICH REGISTERED
----------                                     --------------                         -----------------------
<S>                     <C>                                                           <C>
CMS ENERGY CORPORATION  Common Stock, $.01 par value                                  New York Stock Exchange
CMS ENERGY TRUST I      7.75% Quarterly Income Preferred Securities                   New York Stock Exchange
CONSUMERS ENERGY
  COMPANY               Preferred Stocks, $100 par value: $4.16 Series, $4.50 Series  New York Stock Exchange
CONSUMERS ENERGY
  COMPANY FINANCING IV  9.00% Trust Originated Preferred Securities                   New York Stock Exchange
</Table>

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:  None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
CMS ENERGY CORPORATION:  Yes X  No [ ]
CONSUMERS ENERGY COMPANY:  Yes X  No [ ]

Indicate by check mark if the Registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
CMS ENERGY CORPORATION:  Yes [ ]  No X
CONSUMERS ENERGY COMPANY:  Yes [ ]  No X

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.  Yes X  No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  [ ]

Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer (as defined in Exchange Act Rule
12b-2).
CMS ENERGY CORPORATION:  Large accelerated filer X  Accelerated filer [ ]
Non-accelerated filer [ ]
CONSUMERS ENERGY COMPANY:  Large accelerated filer [ ]  Accelerated filer [ ]
Non-accelerated filer X

Indicate by check mark whether the Registrant is a shell company (as defined in
Exchange Act Rule 12b-2).
CMS ENERGY CORPORATION:  Yes [ ]  No X
CONSUMERS ENERGY COMPANY:  Yes [ ]  No X

The aggregate market value of CMS Energy voting and non-voting common equity
held by non-affiliates was $3.301 billion for the 219,158,729 CMS Energy Common
Stock shares outstanding on June 30, 2005 based on the closing sale price of
$15.06 for CMS Energy Common Stock, as reported by the New York Stock Exchange
on such date.

There were 220,758,573 shares of CMS Energy Common Stock outstanding on February
21, 2006. On February 21, 2006, CMS Energy held all voting and non-voting common
equity of Consumers.

Documents incorporated by reference:  CMS Energy's proxy statement and
Consumers' information statement relating to the 2006 annual meeting of
shareholders to be held May 19, 2006, is incorporated by reference in Part III,
except for the compensation and human resources committee report and audit
committee report contained therein.
<PAGE>

                             CMS Energy Corporation
                                      and
                            Consumers Energy Company

 Annual Reports on Form 10-K to the Securities and Exchange Commission for the
                                   Year Ended
                               December 31, 2005

     This combined Form 10-K is separately filed by CMS Energy Corporation and
Consumers Energy Company. Information in this combined Form 10-K relating to
each individual registrant is filed by such registrant on its own behalf.
Consumers Energy Company makes no representation regarding information relating
to any other companies affiliated with CMS Energy Corporation other than its own
subsidiaries.

                               TABLE OF CONTENTS

<Table>
<Caption>
                                                                                 PAGE
                                                                                 ----
<S>               <C>                                                            <C>
Glossary......................................................................       4
PART I:
Item 1.           Business....................................................       9
Item 1A.          Risk Factors................................................      26
Item 1B.          Unresolved Staff Comments...................................      36
Item 2.           Properties..................................................      36
Item 3.           Legal Proceedings...........................................      36
Item 4.           Submission of Matters to a Vote of Security Holders.........      40

PART II:
Item 5.           Market for Common Equity and Related Stockholder Matters....      41
Item 6.           Selected Financial Data.....................................      41
Item 7.           Management's Discussion and Analysis of Financial Condition
                  and Results  of Operations..................................      41
Item 7A.          Quantitative and Qualitative Disclosures About Market
                  Risk........................................................      42
Item 8.           Financial Statements and Supplementary Data.................      43
Item 9.           Changes in and Disagreements With Accountants on Accounting
                  and  Financial Disclosure...................................    CO-1
Item 9A.          Controls and Procedures.....................................    CO-1
Item 9B.          Other Information...........................................   CO-10

PART III:
Item 10.          Directors and Executive Officers............................   CO-11
Item 11.          Executive Compensation......................................   CO-11
Item 12.          Security Ownership of Certain Beneficial Owners and
                  Management Related  Stockholder Matters.....................   CO-12
Item 13.          Certain Relationships and Related Transactions..............   CO-12
Item 14.          Principal Accountant Fees and Services......................   CO-13

PART IV:
Item 15.          Exhibits, Financial Statement Schedules.....................   CO-13
</Table>

                                        2
<PAGE>

                       This page intentionally left blank

                                        3
<PAGE>

                                    GLOSSARY

     Certain terms used in the text and financial statements are defined below

<Table>
<S>                                           <C>
ABATE.....................................    Association of Businesses Advocating Tariff Equity
ABO.......................................    Accumulated Benefit Obligation. The liabilities of a
                                              pension plan based on service and pay to date. This
                                              differs from the Projected Benefit Obligation that is
                                              typically disclosed in that it does not reflect expected
                                              future salary increases.
AFUDC.....................................    Allowance for Funds Used During Construction
ALJ.......................................    Administrative Law Judge
Alliance RTO..............................    Alliance Regional Transmission Organization
AMT.......................................    Alternative minimum tax
APB.......................................    Accounting Principles Board
APB Opinion No. 18........................    APB Opinion No. 18, "The Equity Method of Accounting for
                                              Investments in Common Stock"
APT.......................................    Australian Pipeline Trust
ARO.......................................    Asset retirement obligation
Attorney General..........................    Michigan Attorney General
Bay Harbor................................    a residential/commercial real estate area located near
                                              Petoskey, Michigan. In 2002, CMS Energy sold its
                                              interest in Bay Harbor.
bcf.......................................    Billion cubic feet
Big Rock..................................    Big Rock Point nuclear power plant, owned by Consumers
Bluewater Pipeline........................    Bluewater Pipeline, a 24.9-mile pipeline that extends
                                              from Marysville, Michigan to Armada, Michigan
Board of Directors........................    Board of Directors of CMS Energy
Brownfield site...........................    Provides for a tax incentive for the redevelopment or
                                              improvement of a facility (contaminated property), or
                                              functionally obsolete or blighted property, provided
                                              that certain conditions are met.
Btu.......................................    British thermal unit
CEO.......................................    Chief Executive Officer
CFO.......................................    Chief Financial Officer
CFTC......................................    Commodity Futures Trading Commission
CKD.......................................    Cement Kiln Dust
Clean Air Act.............................    Federal Clean Air Act, as amended
CMS Energy................................    CMS Energy Corporation, the parent of Consumers and
                                              Enterprises
CMS Energy Common Stock or common stock...    Common stock of CMS Energy, par value $.01 per share
CMS Electric and Gas......................    CMS Electric and Gas Company, a subsidiary of
                                              Enterprises
CMS ERM...................................    CMS Energy Resource Management Company, formerly CMS
                                              MST, a subsidiary of Enterprises
CMS Field Services........................    CMS Field Services, Inc., formerly a wholly owned
                                              subsidiary of CMS Gas Transmission. The sale of this
                                              subsidiary closed in July 2003.
CMS Gas Transmission......................    CMS Gas Transmission Company, a wholly owned subsidiary
                                              of Enterprises
CMS Generation............................    CMS Generation Co., a wholly owned subsidiary of
                                              Enterprises
CMS Holdings..............................    CMS Midland Holdings Company, a subsidiary of Consumers
CMS International Ventures................    CMS International Ventures LLC, a subsidiary of
                                              Enterprises
CMS Midland...............................    CMS Midland Inc., a subsidiary of Consumers
</Table>

                                        4
<PAGE>
<Table>
<S>                                           <C>
CMS MST...................................    CMS Marketing, Services and Trading Company, a wholly
                                              owned subsidiary of Enterprises, whose name was changed
                                              to CMS ERM effective January 2004
CMS Oil and Gas...........................    CMS Oil and Gas Company, formerly a subsidiary of
                                              Enterprises
CMS Viron.................................    CMS Viron Corporation, formerly a wholly owned
                                              subsidiary of CMS Energy
Consumers.................................    Consumers Energy Company, a subsidiary of CMS Energy
Court of Appeals..........................    Michigan Court of Appeals
CPEE......................................    Companhia Paulista de Energia Eletrica, a subsidiary of
                                              Enterprises
Customer Choice Act.......................    Customer Choice and Electricity Reliability Act, a
                                              Michigan statute enacted in June 2000
DCCP......................................    Defined Company Contribution Plan
Detroit Edison............................    The Detroit Edison Company, a non-affiliated company
DIG.......................................    Dearborn Industrial Generation, LLC, a wholly owned
                                              subsidiary of CMS Energy
DOE.......................................    U.S. Department of Energy
DOJ.......................................    U.S. Department of Justice
Dow.......................................    The Dow Chemical Company, a non-affiliated company
DSM.......................................    Demand-side management
EISP......................................    Executive Incentive Separation Plan
EITF......................................    Emerging Issues Task Force
EITF Issue No. 02-03......................    Issues Involved in Accounting for Derivative Contracts
                                              Held for Trading Purposes and Contracts Involved in
                                              Energy Trading and Risk Management Activities
El Chocon.................................    The 1,200 MW hydro power plant located in Argentina, in
                                              which CMS Generation holds a 17.23 percent ownership
                                              interest
Enterprises...............................    CMS Enterprises Company, a subsidiary of CMS Energy
EPA.......................................    U.S. Environmental Protection Agency
EPS.......................................    Earnings per share
ERISA.....................................    Employee Retirement Income Security Act
EURIBOR...................................    Euro Interbank Offered Rate
Exchange Act..............................    Securities Exchange Act of 1934, as amended
FASB......................................    Financial Accounting Standards Board
FASB Interpretation No. 46................    FASB Interpretation No. 46, Consolidation of Variable
                                              Interest Entities
FASB Staff Position, No. SFAS 106-2.......    Accounting and Disclosure Requirements Related to the
                                              Medicare Prescription Drug, Improvement and
                                              Modernization Act of 2003 (May 19, 2004)
FERC......................................    Federal Energy Regulatory Commission
FIN 47....................................    FASB Interpretation No. 47, Accounting for Conditional
                                              Asset Retirement Obligations
First Mortgage Bond Indenture.............    The indenture dated as of September 1, 1945 between
                                              Consumers and JPMorgan Chase Bank, N.A. (ultimate
                                              successor to City Bank Farmers Trust Company), as
                                              Trustee, and as amended and supplemented
FMB.......................................    First Mortgage Bonds
FMLP......................................    First Midland Limited Partnership, a partnership that
                                              holds a 46.4 percent interest in the MCV Facility
FSP.......................................    FASB Staff Position
FTR.......................................    Financial transmission right
GAAP......................................    Generally Accepted Accounting Principles
</Table>

                                        5
<PAGE>
<Table>
<S>                                           <C>
GasAtacama................................    An integrated natural gas pipeline and electric
                                              generation project located in Argentina and Chile, which
                                              includes 702 miles of natural gas pipeline and a 720 MW
                                              gross capacity power plant
GCR.......................................    Gas cost recovery
Goldfields................................    A pipeline business located in Australia, in which CMS
                                              Energy formerly held a 39.7 percent ownership interest
Guardian..................................    Guardian Pipeline, L.L.C., in which CMS Gas Transmission
                                              owned a one-third interest
GVK.......................................    GVK Facility, a 250 MW gas fired power plant located in
                                              South Central India, in which CMS Generation holds a 33
                                              percent interest
GWh.......................................    Gigawatt-hour
IPP.......................................    Independent Power Production
IRS.......................................    Internal Revenue Service
ITC.......................................    Investment tax credit
Jorf Lasfar...............................    The 1,356 MW coal-fueled power plant in Morocco, jointly
                                              owned by CMS Generation and ABB Energy Ventures, Inc.
kWh.......................................    Kilowatt-hour
LIBOR.....................................    London Inter-Bank Offered Rate
LORB......................................    Limited Obligation Revenue Bonds
Loy Yang..................................    The 2,000 MW brown coal fueled Loy Yang A power plant
                                              and an associated coal mine in Victoria, Australia, in
                                              which CMS Generation formerly held a 50 percent
                                              ownership interest
Ludington.................................    Ludington pumped storage plant, jointly owned by
                                              Consumers and Detroit Edison
Marysville................................    CMS Marysville Gas Liquids Company, a Michigan
                                              corporation and a former subsidiary of CMS Gas
                                              Transmission that held a 100 percent interest in
                                              Marysville Fractionation Partnership and a 51 percent
                                              interest in St. Clair Underground Storage Partnership
mcf.......................................    Thousand cubic feet
MCV Facility..............................    A natural gas-fueled, combined-cycle cogeneration
                                              facility operated by the MCV Partnership and in which
                                              Consumers holds a 35 percent lessor interest
MCV Partnership...........................    Midland Cogeneration Venture Limited Partnership in
                                              which Consumers has a 49 percent interest through CMS
                                              Midland
MCV PPA...................................    The Power Purchase Agreement between Consumers and the
                                              MCV Partnership with a 35-year term commencing in March
                                              1990, as amended, and as interpreted by the Settlement
                                              Agreement dated as of January 1, 1999 between the MCV
                                              Partnership and Consumers.
MD&A......................................    Management's Discussion and Analysis
MDEQ......................................    Michigan Department of Environmental Quality
METC......................................    Michigan Electric Transmission Company, LLC
Midwest Energy Market.....................    An energy market developed by the MISO to provide
                                              day-ahead and real-time market information and
                                              centralized dispatch for market participants
MISO......................................    Midwest Independent Transmission System Operator, Inc.
Moody's...................................    Moody's Investors Service, Inc.
MPSC......................................    Michigan Public Service Commission
MSBT......................................    Michigan Single Business Tax
MW........................................    Megawatts
NEIL......................................    Nuclear Electric Insurance Limited, an industry mutual
                                              insurance company owned by member utility companies
NERC......................................    North American Electric Reliability Council
</Table>

                                        6
<PAGE>
<Table>
<S>                                           <C>
Neyveli...................................    CMS Generation Neyveli Ltd, a 250 MW lignite-fired power
                                              station located in Neyveli, Tamil Nadu, India, in which
                                              CMS International Ventures holds a 50 percent interest
NMC.......................................    Nuclear Management Company LLC, formed in 1999 by
                                              Northern States Power Company (now Xcel Energy Inc.),
                                              Alliant Energy, Wisconsin Electric Power Company, and
                                              Wisconsin Public Service Company to operate and manage
                                              nuclear generating facilities owned by the four
                                              utilities
NOL.......................................    Net Operating Loss
NRC.......................................    Nuclear Regulatory Commission
NYMEX.....................................    New York Mercantile Exchange
OPEB......................................    Postretirement benefit plans other than pensions for
                                              retired employees
Palisades.................................    Palisades nuclear power plant, which is owned by
                                              Consumers
Panhandle.................................    Panhandle Eastern Pipe Line Company, including its
                                              subsidiaries Trunkline, Pan Gas Storage, Panhandle
                                              Storage, and Panhandle Holdings. Panhandle was a wholly
                                              owned subsidiary of CMS Gas Transmission. The sale of
                                              this subsidiary closed in June 2003.
Parmelia..................................    A business located in Australia comprised of a pipeline,
                                              processing facilities, and a gas storage facility, a
                                              former subsidiary of CMS Gas Transmission
PCB.......................................    Polychlorinated biphenyl
Pension Plan..............................    The trusteed, non-contributory, defined benefit pension
                                              plan of Panhandle, Consumers and CMS Energy
Price Anderson Act........................    Price Anderson Act, enacted in 1957 as an amendment to
                                              the Atomic Energy Act of 1954, as revised and extended
                                              over the years. This act stipulates between nuclear
                                              licensees and the U.S. government the insurance,
                                              financial responsibility, and legal liability for
                                              nuclear accidents.
PSCR......................................    Power supply cost recovery
PUHCA.....................................    Public Utility Holding Company Act
PURPA.....................................    Public Utility Regulatory Policies Act of 1978
RCP.......................................    Resource Conservation Plan
RFC.......................................    ReliabilityFirst Corporation
ROA.......................................    Retail Open Access
RRP.......................................    Renewable Resources Program
S&P.......................................    Standard & Poor's Ratings Group, a division of The
                                              McGraw-Hill Companies, Inc.
SAB No. 107...............................    Staff Accounting Bulletin No. 107, Share-Based Payment
SCP.......................................    Southern Cross Pipeline in Australia, in which CMS Gas
                                              Transmission formerly held a 45 percent ownership
                                              interest
SEC.......................................    U.S. Securities and Exchange Commission
Section 10d(4) Regulatory Asset...........    Regulatory asset as described in Section 10d(4) of the
                                              Customer Choice Act, as amended
Securitization............................    A financing method authorized by statute and approved by
                                              the MPSC which allows a utility to sell its right to
                                              receive a portion of the rate payments received from its
                                              customers for the repayment of Securitization bonds
                                              issued by a special purpose entity affiliated with such
                                              utility
SENECA....................................    Sistema Electrico del Estado Nueva Esparta C.A., a
                                              subsidiary of Enterprises
SERP......................................    Supplemental Executive Retirement Plan
SFAS......................................    Statement of Financial Accounting Standards
</Table>

                                        7
<PAGE>
<Table>
<S>                                           <C>
SFAS No. 5................................    SFAS No. 5, "Accounting for Contingencies"
SFAS No. 13...............................    SFAS No. 13, "Accounting for Leases"
SFAS No. 71...............................    SFAS No. 71, "Accounting for the Effects of Certain
                                              Types of Regulation"
SFAS No. 87...............................    SFAS No. 87, "Employers' Accounting for Pensions"
SFAS No. 98...............................    SFAS No. 98, "Accounting for Leases"
SFAS No. 106..............................    SFAS No. 106, "Employers' Accounting for Postretirement
                                              Benefits Other Than Pensions"
SFAS No. 109..............................    SFAS No. 109, "Accounting for Income Taxes"
SFAS No. 115..............................    SFAS No. 115, "Accounting for Certain Investments in
                                              Debt and Equity Securities"
SFAS No. 123..............................    SFAS No. 123, "Accounting for Stock-Based Compensation"
SFAS No. 123(R)...........................    SFAS No. 123 (revised 2004), "Share-Based Payment"
SFAS No. 133..............................    SFAS No. 133, "Accounting for Derivative Instruments and
                                              Hedging Activities, as amended and interpreted"
SFAS No. 143..............................    SFAS No. 143, "Accounting for Asset Retirement
                                              Obligations"
SFAS No. 148..............................    SFAS No. 148, "Accounting for Stock-Based
                                              Compensation -- Transition and Disclosure"
Shuweihat.................................    A power and desalination plant of Emirates CMS Power
                                              Company, in which CMS Generation holds a 20 percent
                                              interest
SLAP......................................    Scudder Latin American Power Fund
Southern Union............................    Southern Union Company, a non-affiliated company
Special Committee.........................    A special committee of independent directors,
                                              established by CMS Energy's Board of Directors, to
                                              investigate matters surrounding round-trip trading
Stranded Costs............................    Costs incurred by utilities in order to serve their
                                              customers in a regulated monopoly environment, which may
                                              not be recoverable in a competitive environment because
                                              of customers leaving their systems and ceasing to pay
                                              for their costs. These costs could include owned and
                                              purchased generation and regulatory assets.
Superfund.................................    Comprehensive Environmental Response, Compensation and
                                              Liability Act
Taweelah..................................    Al Taweelah A2, a power and desalination plant of
                                              Emirates CMS Power Company, in which CMS Generation
                                              holds a forty percent interest
Trunkline.................................    CMS Trunkline Gas Company, LLC, formerly a subsidiary of
                                              CMS Panhandle Holdings, LLC
Trust Preferred Securities................    Securities representing an undivided beneficial interest
                                              in the assets of statutory business trusts, the
                                              interests of which have a preference with respect to
                                              certain trust distributions over the interests of either
                                              CMS Energy or Consumers, as applicable, as owner of the
                                              common beneficial interests of the trusts
Union.....................................    Utility Workers of America, AFL-CIO
VEBA Trusts...............................    VEBA employees' beneficiary association trusts accounts
                                              established to specifically set aside employer
                                              contributed assets to pay for future expenses of the
                                              OPEB plan
</Table>

                                        8
<PAGE>

                                     PART I
                                ITEM 1. BUSINESS

GENERAL

CMS ENERGY

     CMS Energy was formed in Michigan in 1987 and is an energy holding company
operating through subsidiaries in the United States and in selected markets
around the world. Its two principal subsidiaries are Consumers and Enterprises.
Consumers is a public utility that provides natural gas and/or electricity to
almost 6.5 million of Michigan's 10 million residents and serves customers in
all 68 of the state's Lower Peninsula counties. Enterprises, through various
subsidiaries and affiliates, is engaged in diversified energy businesses in the
United States and in selected international markets.

     CMS Energy's consolidated operating revenue was $6.288 billion in 2005,
$5.472 billion in 2004 and $5.513 billion in 2003. CMS Energy operates in three
business segments -- electric utility, gas utility, and enterprises. See
BUSINESS SEGMENTS later in this Item 1 for further discussion of each segment.

CONSUMERS

     Consumers was formed in Michigan in 1968 and is the successor to a
corporation organized in Maine in 1910 that conducted business in Michigan from
1915 to 1968. Consumers serves companies operating in the automotive, metal,
chemical and food products industries as well as a diversified group of other
industries. In 2005, Consumers served 1.79 million electric customers and 1.71
million gas customers.

     Consumers' consolidated operations account for a majority of CMS Energy's
total assets and income, as well as a substantial portion of its operating
revenue. Consumers' consolidated operating revenue was $5.232 billion in 2005,
$4.711 billion in 2004 and $4.435 billion in 2003.

     Consumers' rates and certain other aspects of its business are subject to
the jurisdiction of the MPSC and FERC, as described in CMS ENERGY AND CONSUMERS
REGULATION later in this Item 1.

     CONSUMERS' PROPERTIES -- GENERAL: Consumers owns its principal properties
in fee, except that most electric lines and gas mains are located in public
roads or on land owned by others and are accessed by Consumers pursuant to
easements and other rights. Almost all of Consumers' properties are subject to
the lien of its First Mortgage Bond Indenture. For additional information on
Consumers' properties see BUSINESS SEGMENTS -- Consumers Electric
Utility -- Electric Utility Properties, and -- Consumers Gas Utility -- Gas
Utility Properties, below.

BUSINESS SEGMENTS

CMS ENERGY FINANCIAL INFORMATION

     For further information with respect to operating revenue, net operating
income, identifiable assets and liabilities attributable to all of CMS Energy's
business segments and international and domestic operations, see ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- SELECTED FINANCIAL INFORMATION
and CMS ENERGY'S CONSOLIDATED FINANCIAL STATEMENTS and NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS.

CONSUMERS FINANCIAL INFORMATION

     For further information with respect to operating revenue, net operating
income, identifiable assets and liabilities attributable to Consumers' electric
and gas utility operations, see ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA -- SELECTED FINANCIAL INFORMATION and CONSUMERS' CONSOLIDATED FINANCIAL
STATEMENTS and NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                        9
<PAGE>

CONSUMERS ELECTRIC UTILITY

  ELECTRIC UTILITY OPERATIONS

     Consumers' electric utility operating revenue was $2.701 billion in 2005,
$2.586 billion in 2004 and $2.590 billion in 2003. Consumers' electric utility
operations include the generation, purchase, distribution and sale of
electricity. At year-end 2005, it was authorized to provide service in 60 of the
68 counties of Michigan's Lower Peninsula. Principal cities served include
Battle Creek, Flint, Grand Rapids, Jackson, Kalamazoo, Midland, Muskegon and
Saginaw. Consumers' electric utility customer base includes a mix of
residential, commercial and diversified industrial customers, the largest
segment of which is the automotive industry. Consumers' electric utility
operations are not dependent upon a single customer, or even a few customers,
and the loss of any one or even a few of such customers is not reasonably likely
to have a material adverse effect on its financial condition.

     Consumers' electric utility operations are seasonal. The summer months
usually increase demand for electric energy, principally due to the use of air
conditioners and other cooling equipment, thereby affecting revenues. In 2005,
Consumers' electric sales were 39 billion kWh and retail open access deliveries
were 4 billion kWh, for total electric deliveries of 43 billion kWh. In 2004,
Consumers' electric sales were 36 billion kWh and retail open access deliveries
were 4 billion kWh, for total electric deliveries of 40 billion kWh.

     Consumers' 2005 summer peak demand was 7,845 MW excluding retail open
access loads and 8,474 MW including retail open access loads. For the 2004-05
winter period, Consumers' peak demand was 5,750 MW excluding retail open access
loads and 6,385 MW including retail open access loads. In October 2005,
Consumers experienced peak demand of 6,069 MW excluding retail open access loads
and 6,644 MW including retail open access loads. Based on its summer 2005
forecast, Consumers carried an 11 percent reserve margin target. However, as a
result of lower than forecasted peak loads, Consumers' ultimate reserve margin
was 15 percent compared to 30 percent in 2004. Currently, Consumers owns or
controls capacity necessary to supply approximately 101 percent of projected
firm summer peak load for summer 2006 and is in the process of securing the
additional capacity needed to meet its summer 2006 reserve margin target of 11
percent (111 percent of projected firm summer peak load). The ultimate use of
the reserve margin will depend primarily on summer weather conditions, the level
of retail open access requirements being served by others during the summer, and
any unscheduled plant outages.

  ELECTRIC UTILITY PROPERTIES

     GENERATION: At December 31, 2005, Consumers' electric generating system
consisted of the following:

<Table>
<Caption>
                                                                             2005          2005 NET
                                                                          SUMMER NET      GENERATION
                                                   SIZE AND YEAR         DEMONSTRATED     (MILLIONS
NAME AND LOCATION (MICHIGAN)                     ENTERING SERVICE      CAPABILITY (MWS)    OF KWHS)
----------------------------                   ---------------------   ----------------   ----------
<S>                                            <C>                     <C>                <C>
COAL GENERATION
  J H Campbell 1 & 2 -- West Olive...........  2 Units, 1962-1967             615            4,191
  J H Campbell 3 -- West Olive...............  1 Unit, 1980                   765(a)         5,338
  D E Karn -- Essexville.....................  2 Units, 1959-1961             515            3,745
  B C Cobb -- Muskegon.......................  2 Units, 1956-1957             312            2,054
  J R Whiting -- Erie........................  3 Units, 1952-1953             328            2,328
  J C Weadock -- Essexville..................  2 Units, 1955-1958             302            2,055
                                                                            -----          -------
Total coal generation........................                               2,837           19,711
                                                                            -----          -------
OIL/GAS GENERATION
  B C Cobb -- Muskegon.......................  3 Units, 1999-2000(b)          183               43
  D E Karn -- Essexville.....................  2 Units, 1975-1977           1,276              486
                                                                            -----          -------
Total oil/gas generation.....................                               1,459              529
                                                                            -----          -------
</Table>

                                        10
<PAGE>

<Table>
<Caption>
                                                                             2005          2005 NET
                                                                          SUMMER NET      GENERATION
                                                   SIZE AND YEAR         DEMONSTRATED     (MILLIONS
NAME AND LOCATION (MICHIGAN)                     ENTERING SERVICE      CAPABILITY (MWS)    OF KWHS)
----------------------------                   ---------------------   ----------------   ----------
<S>                                            <C>                     <C>                <C>
HYDROELECTRIC
  Conventional Hydro Generation..............  13 Plants, 1906-1949            74              387
  Ludington Pumped Storage...................  6 Units, 1973                  955(c)          (516)(d)
                                                                            -----          -------
Total Hydroelectric..........................                               1,029             (129)
                                                                            -----          -------
NUCLEAR GENERATION
  Palisades -- South Haven...................  1 Unit, 1971                   778            6,636
                                                                            -----          -------
GAS/OIL COMBUSTION TURBINE
  Generation.................................  7 Plants, 1966-1971            332(e)            52
                                                                            -----          -------
Total owned generation.......................                               6,435           26,799
PURCHASED AND INTERCHANGE POWER
  Capacity...................................                               2,516(f)
                                                                            -----
Total........................................                               8,951
                                                                            =====
</Table>

-------------------------

(a)  Represents Consumers' share of the capacity of the J H Campbell 3 unit, net
     of 6.69 percent (ownership interests of the Michigan Public Power Agency
     and Wolverine Power Supply Cooperative, Inc.).

(b)  Cobb 1-3 are retired coal-fired units that were converted to gas-fired.
     Units were placed back into service in the years indicated.

(c)  Represents Consumers' share of the capacity of Ludington. Consumers and
     Detroit Edison have 51 percent and 49 percent undivided ownership,
     respectively, in the plant.

(d)  Represents Consumers' share of net pumped storage generation. This facility
     electrically pumps water during off-peak hours for storage to later
     generate electricity during peak-demand hours.

(e)  Campbell A (13 MW) was on an extended forced outage and therefore has not
     been included in the total.

(f)  Includes 1,240 MW of purchased contract capacity from the MCV Facility.

     In 2005, through the Midwest Energy Market, long-term purchase contracts,
options, spot market and other seasonal purchases, Consumers purchased up to
2,522 MW of net capacity from others, which amounted to 32 percent of Consumers'
total system requirements.

     DISTRIBUTION: Consumers' distribution system includes:

     - 363 miles of high-voltage distribution radial lines operating at 120
       kilovolts and above;

     - 4,180 miles of high-voltage distribution overhead lines operating at 23
       kilovolts and 46 kilovolts;

     - 17 subsurface miles of high-voltage distribution underground lines
       operating at 23 kilovolts and 46 kilovolts;

     - 55,373 miles of electric distribution overhead lines;

     - 9,275 subsurface miles of underground distribution lines; and

     - substations having an aggregate transformer capacity of 22,761,970
       kilovoltamperes.

     Consumers is interconnected to METC, a member of MISO. METC owns an
interstate high voltage electric transmission system located in Michigan and is
interconnected with neighboring utilities as well as out-state transmission
systems.

     FUEL SUPPLY: Consumers has four generating plant sites that burn coal. In
2005, these plants produced a combined total of 19,711 million kWhs of
electricity, which represents 75 percent of Consumers' 26,347 million kWhs
baseload supply, the capacity used to serve a constant level of customer demand.
These plants burned 9.9 million tons of coal in 2005. On December 31, 2005,
Consumers had on hand a 33-day supply of coal.

                                        11
<PAGE>

     Consumers enters into a number of purchase obligations that represent
normal business operating contracts. These contracts are used to assure an
adequate supply of goods and services necessary to operate its business and to
minimize exposure to market price fluctuations. Consumers believes that these
future costs are prudent and reasonably assured of recovery in future rates.

     Consumers has entered into coal supply contracts with various suppliers and
associated rail transportation contracts for its coal-fired generating stations.
Under the terms of these agreements, Consumers is obligated to take physical
delivery of the coal and make payment based upon the contract terms. Consumers'
coal supply contracts expire through 2010, and total an estimated $661 million.
Its coal transportation contracts expire through 2009, and total an estimated
$314 million. Long-term coal supply contracts have accounted for approximately
60 to 90 percent of Consumers' annual coal requirements over the last 10 years.
Although future contract coverage is not finalized at this time, Consumers
believes that it will be within the historic 60 to 90 percent range.

     At December 31, 2005, Consumers had future unrecognized commitments to
purchase capacity and energy under long-term power purchase agreements with
various generating plants. These contracts require monthly capacity payments
based on the plants' availability or deliverability. These payments for 2006
through 2030 total an estimated $4.468 billion, to present value. This amount
may vary depending upon plant availability and fuel costs. Consumers is
obligated to pay capacity charges based only on the amount of capacity available
at a given time, whether or not power is delivered to Consumers.

     Consumers owns Palisades, an operating nuclear power plant located near
South Haven, Michigan. In May 2001, with the approval of the NRC, Consumers
transferred its authority to operate Palisades to NMC. During 2005, Palisades'
net generation was 6,636 million kWhs, constituting 25 percent of Consumers'
baseload supply. Palisades' nuclear fuel supply responsibilities are under NMC's
control as agent for Consumers. New fuel contracts are being written as NMC
agreements. Consumers/NMC currently have sufficient contracts in place to supply
100 percent of the uranium concentrates and conversion services and 100 percent
of the enrichment services requirements for the 2006 reload. A contract for
uranium concentrates is in place to supply approximately 85 percent of the 2007
reload requirements. A contract for conversion services is in place to supply
approximately 43 percent of the 2007 reload requirements and a contract for
enrichment services is in place to supply approximately 100 percent of the 2007
reload requirements. A mix of spot, medium and long-term contracts are being
negotiated with producers and service suppliers who participate in the world
nuclear fuel marketplace to provide for the remaining open requirements for the
2007 reload.

     Consumers has a contract for nuclear fuel fabrication services in place for
the 2006 reload. Contract negotiations are currently ongoing with the current
nuclear fuel fabrication vendor to enter into a new contract to cover reloads in
2006 through 2013.

     In December 2005, Consumers announced plans to sell the Palisades nuclear
plant and enter into a long-term power purchase agreement with the new owner.
Consumers believes a sale is the best option for the company, as it will reduce
risk and improve cash flow while retaining the benefits of the plant for
customers. The Palisades sale will use a competitive bid process, providing
interested companies the option to bid on the plant, as well as the related
decommissioning liabilities and trust funds assets, and spent nuclear fuel at
Palisades and Big Rock. Consumers expects to complete the sale in 2007.

                                        12
<PAGE>

     As shown below, Consumers generates electricity principally from coal and
nuclear fuel.

<Table>
<Caption>
                                                                       MILLIONS OF KWHS
                                                        ----------------------------------------------
POWER GENERATED                                          2005      2004      2003      2002      2001
---------------                                         ------    ------    ------    ------    ------
<S>                                                     <C>       <C>       <C>       <C>       <C>
Coal................................................    19,711    18,810    20,091    19,361    19,203
Nuclear.............................................     6,636     5,346     6,151     6,358     2,326(a)
Oil.................................................       225       193       242       347       331
Gas.................................................       356        38       129       354       670
Hydro...............................................       387       445       335       387       423
Net pumped storage..................................      (516)     (538)     (517)     (486)     (553)
                                                        ------    ------    ------    ------    ------
Total net generation................................    26,799    24,294    26,431    26,321    22,400
                                                        ======    ======    ======    ======    ======
</Table>

-------------------------
(a)  On June 20, 2001, the Palisades reactor was shut down so technicians could
     inspect a small steam leak on a control rod drive assembly. The defective
     components were replaced and the plant returned to service on January 21,
     2002.

     The cost of all fuels consumed, shown below, fluctuates with the mix of
fuel burned.

<Table>
<Caption>
                                                                COST PER
                                                              MILLION BTU
                                                             --------------
FUEL CONSUMED                                                2005     2004     2003     2002     2001
-------------                                                -----    -----    -----    -----    -----
<S>                                                          <C>      <C>      <C>      <C>      <C>
Coal.....................................................    $1.78    $1.43    $1.33    $1.34    $1.38
Oil......................................................     5.98     4.68     3.92     3.49     4.02
Gas......................................................     9.76    10.07     7.62     3.98     4.05
Nuclear..................................................     0.34     0.33     0.34     0.35     0.39
All Fuels(a).............................................     1.64     1.26     1.16     1.19     1.44
</Table>

-------------------------
(a)  Weighted average fuel costs.

     The Nuclear Waste Policy Act of 1982 made the federal government
responsible for the permanent disposal of spent nuclear fuel and high-level
radioactive waste by 1998. The DOE has not arranged for storage facilities and
it does not expect to receive spent nuclear fuel for storage in 2006. Palisades
currently has spent nuclear fuel that exceeds its temporary on-site storage pool
capacity. Therefore, Consumers is storing spent nuclear fuel in NRC-approved
steel and concrete vaults known as "dry casks." For additional information on
disposal of nuclear fuel and Consumers' use of dry casks, see ITEM 7. CMS
ENERGY'S MANAGEMENT'S DISCUSSION AND ANALYSIS -- OUTLOOK -- OTHER ELECTRIC
UTILITY BUSINESS UNCERTAINTIES -- NUCLEAR MATTERS AND ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA -- NOTE 3 OF CMS ENERGY'S NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTINGENCIES) -- OTHER CONSUMERS' ELECTRIC
UTILITY CONTINGENCIES -- NUCLEAR MATTERS and ITEM 7. CONSUMERS' MANAGEMENT'S
DISCUSSION AND ANALYSIS -- OUTLOOK -- OTHER ELECTRIC BUSINESS
UNCERTAINTIES -- NUCLEAR MATTERS AND ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA -- NOTE 3 OF CONSUMERS' NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (CONTINGENCIES) -- OTHER ELECTRIC CONTINGENCIES -- NUCLEAR MATTERS.

CONSUMERS GAS UTILITY

  GAS UTILITY OPERATIONS

     Consumers' gas utility operating revenue was $2.483 billion in 2005, $2.081
billion in 2004 and $1.845 billion in 2003. Consumers' gas utility operations
purchase, transport, store, distribute and sell natural gas. As of December 31,
2005, it was authorized to provide service in 47 of the 68 counties in
Michigan's Lower Peninsula. Principal cities served include Bay City, Flint,
Jackson, Kalamazoo, Lansing, Pontiac and Saginaw, as well as the suburban
Detroit area, where nearly 900,000 of Consumers' gas customers are located.
Consumers' gas utility operations are not dependent upon a single customer, or
even a few customers, and the loss of any one

                                        13
<PAGE>

or even a few of such customers is not reasonably likely to have a material
adverse effect on its financial condition.

     Consumers' gas utility operations are seasonal. Consumers injects natural
gas into storage during the summer months for use during the winter months when
the demand for natural gas is higher. Peak demand usually occurs in the winter
due to colder temperatures and the resulting increased demand for heating fuels.
In 2005, deliveries of natural gas sold by Consumers and by other sellers who
deliver natural gas to customers (including the MCV Partnership) through
Consumers' pipeline and distribution network totaled 355 bcf.

     GAS UTILITY PROPERTIES: Consumers' gas distribution and transmission system
consists of:

     - 26,078 miles of distribution mains throughout Michigan's Lower Peninsula;

     - 1,643 miles of transmission lines throughout Michigan's Lower Peninsula;

     - 7 compressor stations with a total of 162,000 installed horsepower; and

     - 15 gas storage fields located across Michigan with an aggregate storage
       capacity of 308 bcf and a working storage capacity of 143 bcf.

     GAS SUPPLY: In 2005, Consumers purchased 70 percent of the gas it delivered
from United States producers and 24 percent from Canadian producers. Authorized
suppliers in the gas customer choice program supplied the remaining 6 percent of
gas that Consumers delivered.

     Consumers' firm gas transportation agreements are with ANR Pipeline
Company, Great Lakes Gas Transmission, L.P., Trunkline Gas Co., Panhandle
Eastern Pipe Line Company, and Vector Pipeline. Consumers uses these agreements
to deliver gas to Michigan for ultimate deliveries to market. Consumers' firm
transportation and city gate arrangements are capable of delivering over 90
percent of Consumers' total gas supply requirements. As of December 31, 2005,
Consumers' portfolio of firm transportation from pipelines to Michigan is as
follows:

<Table>
<Caption>
                                                                     VOLUME
                                                                (DEKATHERMS/DAY)      EXPIRATION
                                                                ----------------      ----------
<S>                                                             <C>                 <C>        <C>
ANR Pipeline Company........................................          50,000        March      2006
Great Lakes Gas Transmission, L.P. .........................          50,000        March      2007
Great Lakes Gas Transmission, L.P. .........................         100,000        March      2007
Trunkline Gas Co. ..........................................         290,000        October    2008
Panhandle Eastern Pipe Line Company (starting 04/01/06).....          50,000        October    2006
Panhandle Eastern Pipe Line Company (starting 04/01/07).....          50,000        October    2007
Panhandle Eastern Pipe Line Company (starting 04/01/08).....          50,000        October    2008
Panhandle Eastern Pipe Line Company.........................          50,000        October    2008
Vector Pipeline.............................................          50,000        March      2007
</Table>

     Consumers purchases the balance of its required gas supply under
incremental firm transportation contracts, firm city gate contracts, and as
needed, interruptible transportation contracts. The amount of interruptible
transportation service and its use varies primarily with the price for such
service and the availability and price of the spot supplies being purchased and
transported. Consumers' use of interruptible transportation is generally in
off-peak summer months and after Consumers has fully utilized the services under
the firm transportation agreements.

ENTERPRISES

     Enterprises, through various subsidiaries and equity investments, is
engaged in domestic and international diversified energy businesses including
independent power production, electric distribution, and natural gas
transmission, storage and processing. Enterprises' operating revenue was $1.110
billion in 2005, $808 million in 2004 and $1.085 billion in 2003.

                                        14
<PAGE>

NATURAL GAS TRANSMISSION

     CMS Gas Transmission was formed in 1988 and owns, develops and manages
domestic and international natural gas facilities. In 2005, CMS Gas
Transmission's operating revenue was $18 million.

     In June 2003, CMS Gas Transmission sold Panhandle to Southern Union
Panhandle Corp., a newly formed entity owned by Southern Union. Southern Union
Panhandle Corp. purchased all of Panhandle's outstanding capital stock for
approximately $582 million in cash and 3.15 million shares of Southern Union
common stock. Southern Union Panhandle Corp. also assumed approximately $1.166
billion in debt.

     In July 2003, CMS Gas Transmission completed the sale of CMS Field Services
to Cantera Natural Gas, Inc. for gross cash proceeds of approximately $113
million, subject to post closing adjustments, and a $50 million face value note
of Cantera Natural Gas, Inc. The note is payable to CMS Energy for up to $50
million subject to the financial performance of the Fort Union and Bighorn
natural gas gathering systems from 2004 through 2008.

     In August 2004, CMS Gas Transmission sold its interest in Goldfields and
its Parmelia business, a discontinued operation, to APT for A$204 million
(approximately $147 million in U.S. dollars). A $45 million ($29 million
after-tax) gain on the sale of Goldfields includes a $9 million ($6 million
after-tax) foreign currency translation gain. A $10 million ($6 million
after-tax) gain on the sale of Parmelia includes a $3 million ($2 million
after-tax) foreign currency translation loss.

     NATURAL GAS TRANSMISSION PROPERTIES: CMS Gas Transmission has a total of
265 miles of gathering and transmission pipelines located in the state of
Michigan, with a daily capacity of 0.75 bcf. At December 31, 2005, CMS Gas
Transmission had nominal processing capabilities of approximately 0.33 bcf per
day of natural gas in Michigan.

     At December 31, 2005, CMS Gas Transmission had ownership interests in the
following international pipelines:

<Table>
<Caption>
LOCATION                                                    OWNERSHIP INTEREST (%)   MILES OF PIPELINES
--------                                                    ----------------------   ------------------
<S>                                                         <C>                      <C>
Argentina.................................................          29.42                  3,362
Argentina to Brazil.......................................             20                    262
Argentina to Chile........................................             50                    707
</Table>

INDEPENDENT POWER PRODUCTION

     CMS Generation was formed in 1986. It invests in, acquires, develops,
constructs and operates non-utility power generation plants in the United States
and abroad. In 2005, the independent power production business segment's
operating revenue was $315 million.

     INDEPENDENT POWER PRODUCTION PROPERTIES: As of December 31, 2005, CMS
Energy had ownership interests in operating independent power plants (excluding
the MCV Facility) totaling 8,809 gross MW (4,308 net MW). In 2006, Enterprises
plans to complete the restructuring of its operations by narrowing the scope of
its existing operations and commitments to three regions: North America, South
America, and the Middle East/ North Africa. In addition, it plans to sell
designated assets and investments that are under-performing, non-region focused
and non-synergistic with other CMS Energy business units.

     The following table details CMS Energy's interest in independent power
plants as of year-end 2005 (excluding the MCV Facility, discussed further
below):

<Table>
<Caption>
                                                                                          PERCENTAGE OF
                                                                                         GROSS CAPACITY
                                                                                         UNDER LONG-TERM
                                                   OWNERSHIP INTEREST   GROSS CAPACITY      CONTRACT
LOCATION                              FUEL TYPE           (%)                (MW)              (%)
--------                              ---------    ------------------   --------------   ---------------
<S>                                  <C>           <C>                  <C>              <C>
California.........................  Wood                  37.8                36              100
Connecticut........................  Scrap tire             100                31              100
Michigan...........................  Coal                    50                70              100
Michigan...........................  Natural gas            100               710               80
Michigan...........................  Natural gas            100               224                0
Michigan...........................  Wood                    50                40              100
Michigan...........................  Wood                    50                38              100
</Table>

                                        15
<PAGE>

<Table>
<Caption>
                                                                                          PERCENTAGE OF
                                                                                         GROSS CAPACITY
                                                                                         UNDER LONG-TERM
                                                   OWNERSHIP INTEREST   GROSS CAPACITY      CONTRACT
LOCATION                              FUEL TYPE           (%)                (MW)              (%)
--------                              ---------    ------------------   --------------   ---------------
<S>                                  <C>           <C>                  <C>              <C>
New York...........................  Hydro                  0.3                14              100
North Carolina.....................  Wood                    50                50              100
Oklahoma...........................  Natural gas           6.25               124              100
                                                                            -----
  DOMESTIC TOTAL...................                                         1,337
Argentina..........................  Hydro                 17.2             1,320               20(a)
Argentina..........................  Natural gas           98.5               128               57
Argentina..........................  Natural               92.6               597               45
                                     gas/oil
Chile..............................  Natural gas             50               720              100
Ghana..............................  Crude oil               90               224(b)           100
India..............................  Coal                    50               250              100
Jamaica............................  Diesel                42.3                63              100
Morocco............................  Coal                    50             1,356              100(c)
Kingdom of Saudi Arabia............  Natural gas             25               250              100
United Arab Emirates...............  Natural gas             40               777              100
United Arab Emirates...............  Natural gas             20             1,500              100
Venezuela..........................  Gas                     87               287               --(d)
                                     turbine/diesel
  INTERNATIONAL TOTAL..............                                         7,472
TOTAL DOMESTIC AND INTERNATIONAL...                                         8,809
                                                                            =====
</Table>

-------------------------

(a)  El Chocon sells its power primarily on a spot market basis; however, it has
     a high dispatch rate due to low cost. The El Chocon facility is held
     pursuant to a 30-year possession agreement.
(b)  Subject to obtaining adequate financing, the Takoradi Power Plant will be
     converted from single-cycle to combined-cycle with an increase in gross
     capacity from 224 MW to 341 MW.
(c)  The Jorf Lasfar facility is held pursuant to a right of possession
     agreement with the Moroccan state-owned Office National de l'Electricite.
(d)  SENECA is a combined generation/distribution utility that produces power
     for its sole use.

     CMS Midland owns a 49 percent general partnership interest in the MCV
Partnership, which was formed to construct and operate the MCV Facility. The MCV
Facility was sold to five owner trusts and leased back to the MCV Partnership.
CMS Holdings is a limited partner in the FMLP, which is a beneficiary of one of
these trusts. Through the FMLP, CMS Holdings has a 35 percent Lessor interest in
the MCV Facility. The MCV Facility has a net electrical generating capacity of
approximately 1,500 MW. The MCV Partnership contracted to sell electricity to
Consumers for a 35-year period beginning in 1990, and to supply electricity and
steam to Dow.

     For information on capital expenditures, see ITEM 7. CMS ENERGY'S
MANAGEMENT'S DISCUSSION AND ANALYSIS -- CAPITAL RESOURCES AND LIQUIDITY AND ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- NOTE 4 OF CMS ENERGY'S NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (FINANCINGS AND CAPITALIZATION).

OIL AND GAS EXPLORATION AND PRODUCTION

     CMS Energy used to own an oil and gas exploration and production company.
In October 2002, CMS Energy completed its exit from the oil and gas exploration
and production business.

ENERGY RESOURCE MANAGEMENT

     In 2003, CMS ERM closed its Houston, Texas office and in 2004, CMS ERM
changed its name from CMS Marketing, Services and Trading Company to CMS Energy
Resource Management Company. CMS ERM concentrates on the purchase and sale of
energy commodities in support of CMS Energy's generating facilities. In March
2004, CMS ERM discontinued its natural gas retail program as customer contracts
expired. In 2005, CMS

                                        16
<PAGE>

ERM marketed approximately 57 bcf of natural gas and 3,842 GWh of electricity.
Its operating revenue was $589 million in 2005, $381 million in 2004 and $711
million in 2003.

INTERNATIONAL ENERGY DISTRIBUTION

     In October 2001, CMS Energy discontinued the operations of its
international energy distribution business. In 2002, CMS Energy discontinued new
development outside North America, which included closing all non-U.S.
development offices. In 2003, due to the uncertainty of executing an asset sale
on acceptable terms and conditions, CMS Energy reclassified SENECA, which is its
energy distribution business in Venezuela, and CPEE, which is its energy
distribution business in Brazil, to continuing operations.

CMS ENERGY AND CONSUMERS REGULATION

     CMS Energy is a public utility holding company that was previously exempt
from registration under PUHCA of 1935. PUHCA of 1935 was repealed by the Energy
Policy Act of 2005 and replaced by PUHCA of 2005, effective February 8, 2006.
CMS Energy, Consumers and their subsidiaries are subject to regulation by
various federal, state, local and foreign governmental agencies, including those
described below.

MICHIGAN PUBLIC SERVICE COMMISSION

     Consumers is subject to the MPSC's jurisdiction, which regulates public
utilities in Michigan with respect to retail utility rates, accounting, utility
services, certain facilities and various other matters. The MPSC also has rate
jurisdiction over several limited liability companies in which CMS Gas
Transmission has ownership interests. These companies own, or will own, and
operate intrastate gas transmission pipelines.

     The Attorney General, ABATE, and the MPSC staff typically intervene in MPSC
electric- and gas-related proceedings concerning Consumers. For many years, most
significant MPSC orders affecting Consumers have been appealed. Certain appeals
from the MPSC orders are pending in the Court of Appeals.

     RATE PROCEEDINGS: In 2005, the MPSC issued an order that established the
electric authorized rate of return on common equity at 11.15 percent.

     MPSC REGULATORY AND MICHIGAN LEGISLATIVE CHANGES: State regulation of the
retail electric and gas utility businesses has undergone significant changes. In
2000, the Michigan Legislature enacted the Customer Choice Act. The Customer
Choice Act provides that as of January 2002, all electric customers have the
choice to buy generation service from an alternative electric supplier. The
Customer Choice Act also imposes rate reductions, rate freezes and rate caps,
which expired at the end of 2005. For additional information regarding the
Customer Choice Act, see ITEM 7. CMS ENERGY'S MANAGEMENT'S DISCUSSION AND
ANALYSIS -- OUTLOOK -- ELECTRIC UTILITY BUSINESS UNCERTAINTIES -- COMPETITION
AND REGULATORY RESTRUCTURING and ITEM 7. CONSUMERS' MANAGEMENT'S DISCUSSION AND
ANALYSIS -- OUTLOOK -- ELECTRIC BUSINESS UNCERTAINTIES -- COMPETITION AND
REGULATORY RESTRUCTURING.

     Consumers transports the natural gas commodity that is sold to some
customers by competitors like gas producers, marketers and others. Pursuant to a
gas customer choice program that Consumers implemented, as of April 2003 all of
Consumers' gas customers were eligible to select an alternative gas commodity
supplier. Consumers' current GCR mechanism allows it to recover from its
customers all prudently incurred costs to purchase natural gas and transport it
to Consumers' facilities. For additional information, see ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA -- NOTE 3 OF CMS ENERGY'S NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTINGENCIES) -- CONSUMERS' GAS UTILITY RATE
MATTERS and ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- NOTE 3 OF
CONSUMERS' NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINGENCIES) -- GAS
RATE MATTERS.

FEDERAL ENERGY REGULATORY COMMISSION

     The FERC has exercised limited jurisdiction over several independent power
plants in which CMS Generation has ownership interests, as well as over CMS ERM.
Among other things, FERC jurisdiction relates to the acquisition, operation and
disposal of certain assets and facilities and to the service provided and rates
charged. The FERC also has limited jurisdiction over CMS Energy with respect to
certain acquisitions of assets

                                        17
<PAGE>

and other holding company matters. Some of Consumers' gas business is also
subject to regulation by the FERC, including a blanket transportation tariff
pursuant to which Consumers can transport gas in interstate commerce.

     The FERC also regulates certain aspects of Consumers' electric operations
including compliance with FERC accounting rules, wholesale rates, operation of
licensed hydro-electric generating plants, transfers of certain facilities, and
corporate mergers and issuance of securities. The FERC is currently soliciting
comments on whether it should exercise jurisdiction over power marketers like
CMS ERM, requiring them to follow the FERC's uniform system of accounts and seek
authorization for issuance of securities and assumption of liabilities. These
issues are pending before the agency.

NUCLEAR REGULATORY COMMISSION

     Under the Atomic Energy Act of 1954, as amended, and the Energy
Reorganization Act of 1974, Consumers is subject to the jurisdiction of the NRC
with respect to the design, construction, operation and decommissioning of its
nuclear power plants. Consumers is also subject to NRC jurisdiction with respect
to certain other uses of nuclear material. These and other matters concerning
Consumers' nuclear plants are more fully discussed in ITEM 7. CMS ENERGY'S
MANAGEMENT'S DISCUSSION AND ANALYSIS -- OUTLOOK -- OTHER ELECTRIC UTILITY
BUSINESS UNCERTAINTIES -- NUCLEAR MATTERS AND ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA -- NOTE 3 (CONTINGENCIES) OF CMS ENERGY'S NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS -- OTHER CONSUMERS' ELECTRIC UTILITY
CONTINGENCIES -- NUCLEAR PLANT DECOMMISSIONING and ITEM 7. CONSUMERS'
MANAGEMENT'S DISCUSSION AND ANALYSIS -- OUTLOOK -- OTHER ELECTRIC BUSINESS
UNCERTAINTIES -- NUCLEAR MATTERS AND ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA -- NOTE 3 (CONTINGENCIES) OF CONSUMERS' NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS -- OTHER ELECTRIC CONTINGENCIES -- NUCLEAR PLANT
DECOMMISSIONING.

OTHER REGULATION

     The Secretary of Energy regulates the importation and exportation of
natural gas and has delegated various aspects of this jurisdiction to the FERC
and the DOE's Office of Fossil Fuels.

     Pipelines owned by system companies are subject to the Natural Gas Pipeline
Safety Act of 1968 and the Pipeline Safety Improvement Act of 2002, which
regulates the safety of gas pipelines. Consumers is also subject to the
Hazardous Liquid Pipeline Safety Act of 1979, which regulates oil and petroleum
pipelines.

CMS ENERGY AND CONSUMERS ENVIRONMENTAL COMPLIANCE

     CMS Energy, Consumers and their subsidiaries are subject to various
federal, state and local regulations for environmental quality, including air
and water quality, waste management, zoning and other matters.

     CMS Energy has significant possible liability for its obligations
associated with Bay Harbor. For additional information, see ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA -- NOTE 3 (CONTINGENCIES) OF CMS ENERGY'S
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

     Consumers has installed and is currently installing modern emission
controls at its electric generating plants and has converted and is converting
electric generating units to burn cleaner fuels. Consumers expects that the cost
of future environmental compliance, especially compliance with clean air laws,
will be significant because of EPA regulations and proposed regulations
regarding nitrogen oxide, particulate-related emissions, and mercury. These
regulations will require Consumers to make significant capital expenditures.

     Consumers is in the process of closing older ash disposal areas at two
plants. Construction, operation, and closure of a modern solid waste disposal
area for ash can be expensive, because of strict federal and state requirements.
In order to significantly reduce ash field closure costs, Consumers has worked
with others to use bottom ash and fly ash as part of temporary and final cover
for ash disposal areas instead of native materials, in cases where such use of
bottom ash and fly ash is compatible with environmental standards. To reduce
disposal volumes, Consumers sells coal ash for use as a filler for asphalt, as
feedstock for the manufacture of Portland cement, for incorporation into
concrete products and for other environmentally compatible uses. The EPA has
announced its intention to develop new nationwide standards for ash disposal
areas. Consumers intends to work

                                        18
<PAGE>

through industry groups to help ensure that any such regulations require only
the minimum cost necessary to adhere to standards that are consistent with
protection of the environment.

     Consumers' electric generating plants must comply with rules that
significantly reduce the number of fish killed by plant cooling water intake
systems. Consumers is studying options to determine the most cost-effective
solutions for compliance.

     Like most electric utilities, Consumers has PCB in some of its electrical
equipment. During routine maintenance activities, Consumers identified PCB as a
component in certain paint, grout and sealant materials at the Ludington Pumped
Storage facility. Consumers removed and replaced part of the PCB material.
Consumers has proposed a plan to the EPA to deal with the remaining materials
and is waiting for a response from the EPA.

     Certain environmental regulations affecting CMS Energy and Consumers
include, but are not limited to, the Clean Air Act Amendments of 1990 and
Superfund. Superfund can require any individual or entity that may have owned or
operated a disposal site, as well as transporters or generators of hazardous
substances that were sent to such site, to share in remediation costs for the
site.

     CMS Energy's and Consumers' current insurance coverage does not extend to
certain environmental cleanup costs or environmental damages, such as claims for
air pollution, damage to sites owned by CMS Energy or Consumers, and for some
past PCB contamination and for some long-term storage or disposal of pollutants.

     For additional information concerning environmental matters, including
estimated capital expenditures to reduce nitrogen oxide related emissions, see
ITEM 7. CMS ENERGY'S MANAGEMENT'S DISCUSSION AND ANALYSIS -- OUTLOOK -- ELECTRIC
UTILITY BUSINESS UNCERTAINTIES -- ELECTRIC ENVIRONMENTAL ESTIMATES and ITEM 7.
CONSUMERS' MANAGEMENT'S DISCUSSION AND ANALYSIS -- OUTLOOK -- ELECTRIC BUSINESS
UNCERTAINTIES -- ELECTRIC ENVIRONMENTAL ESTIMATES.

CMS ENERGY AND CONSUMERS COMPETITION

ELECTRIC COMPETITION

     Consumers' electric utility business experiences actual and potential
competition from many sources, both in the wholesale and retail markets, as well
as in electric generation, electric delivery and retail services.

     In the wholesale electricity markets, Consumers competes with other
wholesale suppliers, marketers and brokers. Electric competition in the
wholesale markets increased significantly since 1996 due to FERC Order 888.
While Consumers is still active in wholesale electricity markets, wholesale for
resale transactions by Consumers generated an immaterial amount of Consumers'
2005 revenues from electric utility operations. Consumers believes future loss
of wholesale for resale transactions will be insignificant.

     Price is the principal method of competition for electric generation
services. The Customer Choice Act gives all electric customers the right to buy
generation service from an alternative electric supplier. In June 2004, the MPSC
granted Consumers recovery of implementation costs incurred for the Electric
Customer Choice program. In November 2004, the MPSC adopted a mechanism pursuant
to the Customer Choice Act to provide for recovery of stranded costs that occur
when customers leave Consumers' system to purchase electricity from alternative
electric suppliers. In January 2006, the MPSC approved cost-based retail open
access distribution tariffs. A significant decrease in retail electric
competition occurred in 2005 due to changes in market conditions, including
increased uncertainty and volatility in fuel commodity prices. At December 31,
2005, alternative electric suppliers were providing 552 MW of generation service
to ROA customers. This amount represents a decrease of 40 percent compared to
December 31, 2004, and is 7 percent of Consumers' total distribution load. It is
difficult to predict future ROA customer trends.

     In addition to retail electric customer choice, Consumers has competition
or potential competition from:

     - customers relocating for economic reasons outside Consumers' service
       territory;

     - municipalities owning or operating competing electric delivery systems;

     - customer self-generation; and

     - adjacent utilities that extend lines to customers in contiguous service
       territories.

                                        19
<PAGE>

     Consumers addresses this competition by monitoring activity in adjacent
areas and enforcing compliance with MPSC and FERC rules, providing non-energy
services, and providing tariff-based incentives that support economic
development.

     Consumers offers non-energy revenue services to electric customers,
municipalities and other utilities in an effort to offset costs. These services
include engineering and consulting, construction of customer-owned distribution
facilities, equipment sales (such as transformers), power quality analysis,
fiber optic line construction, meter reading and joint construction for phone
and cable. Consumers faces competition from many sources, including energy
management services companies, other utilities, contractors, and retail
merchandisers.

     CMS ERM, a non-utility electric subsidiary, continues to focus on
optimizing CMS Energy's independent power production portfolio. CMS Energy's
independent power production business segment, another non-utility electric
subsidiary, faces competition from generators, marketers and brokers, as well as
other utilities marketing power at lower power prices on the wholesale market.

     For additional information concerning electric competition, see ITEM 7. CMS
ENERGY'S MANAGEMENT'S DISCUSSION AND ANALYSIS -- OUTLOOK -- ELECTRIC UTILITY
BUSINESS UNCERTAINTIES and ITEM 7. CONSUMERS' MANAGEMENT'S DISCUSSION AND
ANALYSIS -- OUTLOOK -- ELECTRIC BUSINESS UNCERTAINTIES.

GAS COMPETITION

     Competition has existed for the past decade in various aspects of
Consumers' gas utility business, and is likely to increase. Competition
traditionally comes from other gas suppliers taking advantage of direct access
to Consumers' customers and from alternate fuels and energy sources, such as
propane, oil and electricity.

INSURANCE

     CMS Energy and its subsidiaries, including Consumers, maintain insurance
coverage similar to comparable companies in the same lines of business. The
insurance policies are subject to terms, conditions, limitations and exclusions
that might not fully compensate CMS Energy for all losses. A portion of each
loss is generally assumed by CMS Energy in the form of deductibles and
self-insured retentions that, in some cases, are substantial. As CMS Energy
renews its policies it is possible that some of the insurance coverage may not
be renewed or obtainable on commercially reasonable terms due to restrictive
insurance markets.

     For a discussion of nuclear insurance coverage, see ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA -- NOTE 3 OF CMS ENERGY'S NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTINGENCIES) -- OTHER CONSUMERS' ELECTRIC
UTILITY CONTINGENCIES -- NUCLEAR MATTERS and ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA -- NOTE 3 OF CONSUMERS' NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (CONTINGENCIES) -- OTHER ELECTRIC CONTINGENCIES -- NUCLEAR MATTERS.

EMPLOYEES

CMS ENERGY

     As of December 31, 2005, CMS Energy and its wholly owned subsidiaries,
including Consumers, had 8,713 full-time equivalent employees. Included in the
total are 3,672 employees who are covered by union contracts.

CONSUMERS

     As of December 31, 2005, Consumers and its subsidiaries had 8,114 full-time
equivalent employees. Included in the total are 3,339 full-time operating,
maintenance and construction employees and 327 full-time and part-time call
center employees who are represented by the Utility Workers Union of America.

                                        20
<PAGE>

CMS ENERGY EXECUTIVE OFFICERS

     (as of February 1, 2006)

<Table>
<Caption>
NAME                                     AGE                     POSITION                         PERIOD
----                                     ---                     --------                         ------
<S>                                      <C>    <C>                                            <C>
David W. Joos........................    52     President and Chief Executive Officer of
                                                CMS Energy                                     2004-Present
                                                Chairman of the Board, Chief Executive
                                                  Officer of Enterprises                       2003-Present
                                                President, Chief Operating Officer of CMS
                                                  Energy                                       2001-2004
                                                Chief Executive Officer of Consumers           2004-Present
                                                President, Chief Operating Officer of
                                                  Consumers                                    2001-2004
                                                President, Chief Operating Officer of
                                                  Enterprises                                  2001-2003
                                                Director of CMS Energy                         2001-Present
                                                Director of Consumers                          2001-Present
                                                Director of Enterprises                        2000-Present
                                                Executive Vice President, Chief Operating
                                                  Officer -- Electric of CMS Energy            2000-2001
                                                Executive Vice President, Chief Operating
                                                  Officer -- Electric of Enterprises           2000-2001
                                                Executive Vice President, President and
                                                  Chief Executive Officer -- Electric of
                                                  Consumers                                    1997-2001
S. Kinnie Smith, Jr. ................    74     Chief Legal Officer of CMS Energy              2/2006-
                                                                                               Present
                                                General Counsel of CMS Energy                  2002-2/2006
                                                Vice Chairman of the Board of Enterprises      2003-Present
                                                Vice Chairman of the Board of CMS Energy       2002-Present
                                                Vice Chairman of the Board of Consumers        2002-Present
                                                Director of CMS Energy                         2002-Present
                                                Director of Consumers                          2002-Present
                                                Director of Enterprises                        2003-Present
                                                Vice Chairman of Trans-Elect, Inc.             2002
                                                Senior Counsel at Skadden, Arps, Slate,
                                                  Meagher, & Flom LLP                          1996-2002
Thomas J. Webb.......................    53     Executive Vice President, Chief Financial
                                                Officer of CMS Energy                          2002-Present
                                                Executive Vice President, Chief Financial
                                                  Officer of Consumers                         2002-Present
                                                Executive Vice President, Chief Financial
                                                  Officer of Enterprises                       2002-Present
                                                Director of Enterprises                        2002-Present
                                                Executive Vice President, Chief Financial
                                                  Officer of Panhandle Eastern Pipe Line
                                                  Company                                      2002-2003
                                                Executive Vice President, Chief Financial
                                                  Officer of Kellogg Company                   1999-2002
Thomas W. Elward.....................    57     President, Chief Operating Officer of
                                                Enterprises                                    2003-Present
                                                President, Chief Executive Officer of CMS
                                                  Generation Co.                               2002-Present
                                                Director of Enterprises                        2003-Present
                                                Director of CMS Generation Co.                 2002-Present
                                                Senior Vice President of Enterprises           2002-2003
                                                Senior Vice President of CMS Generation Co.    1998-2001
</Table>

                                        21
<PAGE>

<Table>
<Caption>
NAME                                     AGE                     POSITION                         PERIOD
----                                     ---                     --------                         ------
<S>                                      <C>    <C>                                            <C>
John G. Russell......................    48     President and Chief Operating Officer of
                                                  Consumers                                    2004-Present
                                                Executive Vice President, President and
                                                  Chief Executive Officer -- Electric of
                                                  Consumers                                    2001-2004
                                                Senior Vice President of Consumers             2000-2001
                                                Vice President of Consumers                    1999-2000
David G. Mengebier...................    48     Senior Vice President of Enterprises           2003-Present
                                                Senior Vice President of CMS Energy            2001-Present
                                                Senior Vice President of Consumers             2001-Present
                                                Vice President of CMS Energy                   1999-2001
                                                Vice President of Consumers                    1999-2001
John F. Drake........................    57     Senior Vice President of Enterprises           2003-Present
                                                Senior Vice President of CMS Energy            2002-Present
                                                Senior Vice President of Consumers             2002-Present
                                                Vice President of CMS Energy                   1997-2002
                                                Vice President of Consumers                    1998-2002
Glenn P. Barba.......................    40     Vice President, Chief Accounting Officer of
                                                  Enterprises                                  2003-Present
                                                Vice President, Controller and Chief
                                                  Accounting Officer of CMS Energy             2003-Present
                                                Vice President, Controller and Chief
                                                  Accounting Officer of Consumers              2003-Present
                                                Vice President and Controller of Consumers     2001-2003
                                                Controller of CMS Generation                   1997-2001
James E. Brunner*....................    53     Senior Vice President and General Counsel
                                                of CMS Energy and Consumers                    2/2006-
                                                                                               Present
                                                Vice President and General Counsel of
                                                  Consumers                                    2004-2/2006
</Table>

-------------------------

* From 1993 until July of 2004, Mr. Brunner was Assistant General Counsel of
  Consumers.

     There are no family relationships among executive officers and directors of
CMS Energy.

     The present term of office of each of the executive officers extends to the
first meeting of the Board of Directors after the next annual election of
Directors of CMS Energy (scheduled to be held on May 19, 2006).

                                        22
<PAGE>

CONSUMERS EXECUTIVE OFFICERS

     (as of February 1, 2006)

<Table>
<Caption>
NAME                                     AGE                     POSITION                         PERIOD
----                                     ---                     --------                         ------
<S>                                      <C>    <C>                                            <C>
David W. Joos........................    52     President and Chief Executive Officer of
                                                CMS Energy                                     2004-Present
                                                Chairman of the Board, Chief Executive
                                                  Officer of Enterprises                       2003-Present
                                                President, Chief Operating Officer of CMS
                                                  Energy                                       2001-2004
                                                Chief Executive Officer of Consumers           2004-Present
                                                President, Chief Operating Officer of
                                                  Consumers                                    2001-2004
                                                President, Chief Operating Officer of
                                                  Enterprises                                  2001-2003
                                                Director of CMS Energy                         2001-Present
                                                Director of Consumers                          2001-Present
                                                Director of Enterprises                        2000-Present
                                                Executive Vice President, Chief Operating
                                                  Officer -- Electric of CMS Energy            2000-2001
                                                Executive Vice President, Chief Operating
                                                  Officer -- Electric of Enterprises           2000-2001
                                                Executive Vice President, President and
                                                  Chief Executive Officer -- Electric of
                                                  Consumers                                    1997-2001
S. Kinnie Smith, Jr. ................    74     Chief Legal Officer of CMS Energy              2/2006-
                                                                                               Present
                                                General Counsel of CMS Energy                  2002-2/2006
                                                Vice Chairman of the Board of Enterprises      2003-Present
                                                Vice Chairman of the Board of CMS Energy       2002-Present
                                                Vice Chairman of the Board of Consumers        2002-Present
                                                Director of CMS Energy                         2002-Present
                                                Director of Consumers                          2002-Present
                                                Director of Enterprises                        2003-Present
                                                Vice Chairman of Trans-Elect, Inc.             2002
                                                Senior Counsel at Skadden, Arps, Slate,
                                                  Meagher, & Flom LLP                          1996-2002
Thomas J. Webb.......................    53     Executive Vice President, Chief Financial
                                                Officer of CMS Energy                          2002-Present
                                                Executive Vice President, Chief Financial
                                                  Officer of Consumers                         2002-Present
                                                Executive Vice President, Chief Financial
                                                  Officer of Enterprises                       2002-Present
                                                Director of Enterprises                        2002-Present
                                                Executive Vice President, Chief Financial
                                                  Officer of Panhandle Eastern Pipe Line
                                                  Company                                      2002-2003
                                                Executive Vice President, Chief Financial
                                                  Officer of Kellogg Company                   1999-2002
John G. Russell......................    48     President and Chief Operating Officer of
                                                  Consumers                                    2004-Present
                                                Executive Vice President, President and
                                                  Chief Executive Officer -- Electric of
                                                  Consumers                                    2001-2004
                                                Senior Vice President of Consumers             2000-2001
                                                Vice President of Consumers                    1999-2000
</Table>

                                        23
<PAGE>

<Table>
<Caption>
NAME                                     AGE                     POSITION                         PERIOD
----                                     ---                     --------                         ------
<S>                                      <C>    <C>                                            <C>
John F. Drake........................    57     Senior Vice President of Enterprises           2003-Present
                                                Senior Vice President of CMS Energy            2002-Present
                                                Senior Vice President of Consumers             2002-Present
                                                Vice President of CMS Energy                   1997-2002
                                                Vice President of Consumers                    1998-2002
Robert A. Fenech.....................    58     Senior Vice President of Consumers             1997-Present
William E. Garrity...................    57     Senior Vice President of Consumers             2005-Present
                                                Vice President of Consumers                    1999-2005
Frank Johnson........................    57     Senior Vice President of Consumers             2001-Present
                                                President, Chief Executive Officer of CMS
                                                  Electric and Gas                             2000-2002
                                                Vice President, Chief Operating Officer of
                                                  CMS Electric and Gas                         2000
                                                Vice President of CMS Electric and Gas         1996-2000
David G. Mengebier...................    48     Senior Vice President of Enterprises           2003-Present
                                                Senior Vice President of CMS Energy            2001-Present
                                                Senior Vice President of Consumers             2001-Present
                                                Vice President of CMS Energy                   1999-2001
                                                Vice President of Consumers                    1999-2001
Paul N. Preketes.....................    56     Senior Vice President of Consumers             1999-Present
Glenn P. Barba.......................    40     Vice President, Chief Accounting Officer of
                                                  Enterprises                                  2003-Present
                                                Vice President, Controller and Chief
                                                  Accounting Officer of CMS Energy             2003-Present
                                                Vice President, Controller and Chief
                                                  Accounting Officer of Consumers              2003-Present
                                                Vice President and Controller of Consumers     2001-2003
                                                Controller of CMS Generation                   1997-2001
James E. Brunner *...................    53     Senior Vice President and General Counsel
                                                of CMS Energy and Consumers                    2/2006-
                                                                                               Present
                                                Vice President and General Counsel of
                                                  Consumers                                    2004-2/2006
</Table>

-------------------------

* From 1993 until July of 2004, Mr. Brunner was Assistant General Counsel of
  Consumers.

     There are no family relationships among executive officers and directors of
Consumers.

     The present term of office of each of the executive officers extends to the
first meeting of the Board of Directors after the next annual election of
Directors of Consumers (scheduled to be held on May 19, 2006).

AVAILABLE INFORMATION

     CMS Energy's internet address is www.cmsenergy.com. You can access free of
charge on our web site all of our annual reports on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed
pursuant to Section 13(a) or 15(d) of the Exchange Act. Such reports are
available as soon as practical after they are electronically filed with the SEC.
Also on our web site are our:

     - Corporate Governance Principles;

     - Code of Conduct (Code of Business Conduct and Ethics); and

     - Board Committee Charters (including the Audit Committee and the
       Governance and Public Responsibility Committee).

                                        24
<PAGE>

     We will provide this information in print to any shareholder who requests
it.

     You may also read and copy any materials we file with the SEC at the SEC's
Public Reference Room at 100 F Street, NE, Washington DC, 20549. You may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC also maintains an internet site that contains reports,
proxy and information statements, and other information regarding issuers that
file electronically with the SEC. The address is http://www.sec.gov.

                                        25
<PAGE>

                             ITEM 1A. RISK FACTORS

RISKS RELATED TO CMS ENERGY

CMS ENERGY DEPENDS ON DIVIDENDS FROM ITS SUBSIDIARIES TO MEET ITS DEBT SERVICE
OBLIGATIONS.

     Due to its holding company structure, CMS Energy depends on dividends from
its subsidiaries to meet its debt obligations. Restrictions contained in
Consumers' preferred stock provisions and other legal restrictions, such as
certain terms in its articles of incorporation, limit Consumers' ability to pay
dividends or acquire its own stock from CMS Energy. As of December 31, 2005, the
most restrictive provisions in its financing documents allowed Consumers to pay
an aggregate of $300 million in dividends to CMS Energy during any year. At
December 31, 2005 Consumers had $179 million of unrestricted retained earnings
available to pay common stock dividends. If sufficient dividends are not paid to
CMS Energy by its subsidiaries, CMS Energy may not be able to generate the funds
necessary to fulfill its cash obligations, thereby adversely affecting its
liquidity and financial condition.

CMS ENERGY HAS SUBSTANTIAL INDEBTEDNESS THAT COULD LIMIT ITS FINANCIAL
FLEXIBILITY AND HENCE ITS ABILITY TO MEET ITS DEBT SERVICE OBLIGATIONS.

     As of December 31, 2005, CMS Energy had outstanding approximately $2.527
billion aggregate principal amount of indebtedness, including approximately $178
million of subordinated indebtedness relating to its convertible preferred
securities but excluding approximately $4.888 billion of indebtedness of its
subsidiaries. In May 2005, CMS Energy entered into the Sixth Amended and
Restated Credit Agreement in the amount of approximately $300 million. As of
December 31, 2005, there were approximately $96 million of letters of credit
outstanding under the Sixth Amended and Restated Credit Agreement. CMS Energy
and its subsidiaries may incur additional indebtedness in the future.

     The level of CMS Energy's present and future indebtedness could have
several important effects on its future operations, including, among others:

     - a significant portion of its cash flow from operations will be dedicated
       to the payment of principal and interest on its indebtedness and will not
       be available for other purposes;

     - covenants contained in its existing debt arrangements require it to meet
       certain financial tests, which may affect its flexibility in planning
       for, and reacting to, changes in its business;

     - its ability to obtain additional financing for working capital, capital
       expenditures, acquisitions and general corporate and other purposes may
       be limited;

     - it may be at a competitive disadvantage to its competitors that are less
       leveraged; and

     - its vulnerability to adverse economic and industry conditions may
       increase.

     CMS Energy's ability to meet its debt service obligations and to reduce its
total indebtedness will be dependent upon its future performance, which will be
subject to general economic conditions, industry cycles and financial, business
and other factors affecting its operations, many of which are beyond its
control. CMS Energy cannot assure you that its business will continue to
generate sufficient cash flow from operations to service its indebtedness. If it
is unable to generate sufficient cash flows from operations, it may be required
to sell additional assets or obtain additional financings. CMS Energy cannot
assure that additional financing will be available on commercially acceptable
terms or at all.

     There can be no assurance that the requirements of CMS Energy's existing
debt arrangements or other indebtedness will be met in the future. Failure to
comply with those covenants may result in a default with respect to the related
debt and could lead to acceleration of that debt or any instruments evidencing
indebtedness that contain cross-acceleration or cross-default provisions.

     In such a case, there can be no assurance that CMS Energy would be able to
refinance or otherwise repay that indebtedness.

                                        26
<PAGE>

CMS ENERGY CANNOT PREDICT THE OUTCOME OF CLAIMS REGARDING ITS PARTICIPATION IN
THE DEVELOPMENT OF BAY HARBOR OR OTHER LITIGATION IN WHICH SUBSTANTIAL MONETARY
CLAIMS ARE INVOLVED.

     As part of the development of Bay Harbor by certain subsidiaries of CMS
Energy, which went forward under an agreement with the MDEQ, a third party
constructed a golf course over several abandoned cement kiln dust (CKD) piles,
left over from the former cement plant operation on the Bay Harbor site.
Pursuant to the agreement with the MDEQ, CMS Energy constructed a water
collection system to recover seep water from one of the CKD piles. In 2002, CMS
Energy sold its interest in Bay Harbor, but retained its obligations under
previous environmental indemnifications entered into at the inception of the
project.

     In September 2004, the MDEQ issued a notice of noncompliance (NON), after
finding high-pH seep water in Lake Michigan adjacent to the property. The MDEQ
also found higher than acceptable levels of heavy metals, including mercury, in
the seep water.

     In February 2005, the EPA executed an Administrative Order on Consent (AOC)
to address problems at Bay Harbor, upon the consent of CMS Land Company, a
subsidiary of Enterprises and CMS Capital, LLC, a subsidiary of CMS Energy.
Under the AOC, CMS Land Company and CMS Capital, LLC are generally obligated,
among other things, to: (i) engage in measures to restrict access to seep areas,
install methods to interrupt the flow of seep water to Lake Michigan, and take
other measures as may be required by the EPA under an approved "removal action
work plan"; (ii) investigate and study the extent of hazardous substances at the
site, evaluate alternatives to address a long-term remedy, and issue a report of
the investigation and study; and (iii) within 120 days after EPA approval of the
investigation report, enter into an enforceable agreement with the MDEQ to
address a long-term remedy under certain criteria set forth in the AOC. The EPA
approved a final removal action work plan in September 2005.

     The EPA-approved removal action work plan provides for fencing of affected
beachfront areas and installing an underground leachate collection system, among
other elements. The EPA's approvals also specify that a backup "containment and
isolation system," involving dams or barriers in the lake, could be required in
certain areas, if the collection system is ineffective. In addition, there are
indications that CKD may be located on the beach at the west end of the
collection system installation. As a result, construction in the affected area
has been halted pending further investigation. CMS Energy has worked out a
schedule with the EPA to perform further investigation of these conditions and
will deliver a conceptual design to the EPA for a remediation system. CMS Energy
is presently engaged in negotiations with the EPA and the MDEQ concerning
potential interim remediation activities for the Eastern CKD pile, which may
include a carbon dioxide injection system to neutralize high-pH materials and/or
a collection system or systems.

     Several parties have issued demand letters to CMS Energy claiming breach of
the indemnification provisions, making requests for payment of their expenses
related to the NON, and/or claiming damages to property or personal injury with
regard to the matter. Several landowners have threatened litigation in the event
their demands are not met and owners of one parcel have filed a lawsuit in Emmet
County Circuit Court against CMS Energy and several of its subsidiaries, as well
as Bay Harbor Company LLC and David Johnson, one of the developers at Bay
Harbor. CMS Energy responded to the indemnification claims by stating that it
had not breached its indemnity obligations, it will comply with the indemnities,
it has restarted the seep water collection facility and it has responded to the
NON. CMS Energy has entered into various access, purchase and settlement
agreements with several of the affected landowners at Bay Harbor and continues
negotiations with other landowners for access as necessary to implement
remediation measures. CMS Energy will defend vigorously any property damage and
personal injury claims or lawsuits.

     CMS Energy originally recorded a liability for its obligations associated
with this matter in the amount of $45 million in the fourth quarter of 2004.
Under the AOC, CMS Land Company is presently conducting a remedial investigation
of the site, which includes the gathering and analysis of data to be utilized in
arriving at a permanent fix. Based on the evaluation of recent construction
events and site-related data, CMS Energy has increased its cost projections and
reserves to $85 million. An adverse outcome of this matter could, depending on
the size of any indemnification obligation or liability under environmental
laws, have a potentially significant adverse effect on CMS Energy's financial
condition and liquidity and could negatively impact CMS Energy's financial
results. CMS Energy cannot predict the ultimate cost or outcome of this matter.

                                        27
<PAGE>

     In addition to the litigation and proceedings discussed above, CMS Energy
or various of its subsidiaries are parties in other pending litigation in which
substantial monetary damages are sought. An adverse outcome in one or more of
these cases could, depending on the timing and size of any award and the
availability of insurance or reimbursement from third parties, have an adverse
effect on CMS Energy's financial condition, liquidity or results of operations.

CMS ENERGY RETAINS CONTINGENT LIABILITIES IN CONNECTION WITH ITS ASSET SALES.

     The agreements CMS Energy enters into for the sale of assets customarily
include provisions whereby it is required to:

     - retain specified preexisting liabilities such as for taxes and pensions;

     - indemnify the buyers against specified risks, including the inaccuracy of
       representations and warranties it makes; and

     - require payments to the buyers depending on the outcome of post-closing
       adjustments, audits or other reviews.

     Many of these contingent liabilities can remain open for extended periods
of time after the sales are closed. Depending on the extent to which the buyers
may ultimately seek to enforce their rights under these contractual provisions,
and the resolution of any disputes CMS Energy may have concerning them, these
liabilities could have a material adverse effect on its financial condition,
liquidity and results of operations.

     CMS Energy has received a request for indemnification from the purchaser of
CMS Oil and Gas. The indemnification claim relates to the sale by CMS Energy of
its oil, gas and methanol projects in Equatorial Guinea and the claim of the
government of Equatorial Guinea that $142 million in taxes is owed it in
connection with that sale. Based on information currently available, CMS Energy
and its tax advisors have concluded that the government's tax claim is without
merit and the purchaser of CMS Oil and Gas has submitted a response to the
government rejecting the claim. An adverse outcome of this claim could have a
material adverse effect on CMS Energy's financial condition, liquidity and
results of operations.

CMS ENERGY HAS MADE SUBSTANTIAL INTERNATIONAL INVESTMENTS THAT ARE SUBJECT TO
POSSIBLE NATIONALIZATION, EXPROPRIATION OR INABILITY TO CONVERT CURRENCY.

     CMS Energy's investments in selected international markets in electric
generating facilities, natural gas pipelines and electric distribution systems
face a number of risks inherent in acquiring, developing and owning these types
of international facilities. Although CMS Energy maintains insurance for various
risk exposures, including political risk from possible nationalization,
expropriation or inability to convert currency, it is exposed to some risks that
include local political and economic factors over which it has no control, such
as changes in foreign governmental and regulatory policies (including changes in
industrial regulation and control and changes in taxation), changing political
conditions and international monetary fluctuations. In some cases an investment
may have to be abandoned or disposed of at a loss. These factors could have a
significant adverse effect on the financial results of the affected subsidiary
and CMS Energy's financial position and results of operations.

     International investments of the type CMS Energy has made are subject to
the risk that the investments may be expropriated or that the required
agreements, licenses, permits and other approvals may be changed or terminated
in violation of their terms. These kinds of changes could result in a partial or
total loss of CMS Energy's investment.

     The local foreign currency may be devalued, the conversion of the currency
may be restricted or prohibited or other actions, such as increases in taxes,
royalties or import duties, may be taken which adversely affect the value and
the recovery of CMS Energy's investment.

                                        28
<PAGE>

RISKS RELATED TO CMS ENERGY AND CONSUMERS

CMS ENERGY AND CONSUMERS HAVE FINANCING NEEDS AND THEY MAY BE UNABLE TO
SUCCESSFULLY ACCESS BANK FINANCING OR THE CAPITAL MARKETS.

     Consumers expects to incur significant costs for capital expenditures,
including future environmental regulation compliance, especially compliance with
clean air laws. See "CMS Energy and Consumers could incur significant capital
expenditures to comply with environmental standards and face difficulty in
recovering these costs on a current basis" below. As of December 31, 2005,
Consumers had incurred $605 million in capital expenditures to comply with these
regulations and future capital expenditures may total approximately $210 million
between 2006 and 2011.

     CMS Energy and Consumers continue to be challenged by the substantial
increase in natural gas prices. Although Consumers' reasonably and prudently
incurred natural gas purchases are recoverable from its utility customers, as
gas prices increase, the amount it pays for natural gas stored as inventory will
require additional liquidity due to the timing of the cost recoveries from its
customers. Consumers anticipates that it will need a substantial amount of cash
in the summer of 2006 to purchase storage for natural gas for winter 2006-2007.
See "The combined effects of substantially higher natural gas prices,
restrictions on Consumers' ability to issue first mortgage bonds and possible
power purchase supply cost recovery delays may have a negative effect on
Consumers' short-term liquidity" below. CMS Energy and Consumers could also be
required to make additional cash contributions to their employee pension and
benefit plans and become subject to liquidity demands pursuant to commercial
commitments under guarantees, indemnities and letters of credit. Management is
actively pursuing plans to sell assets. There can be no assurances that this
business plan will be successful and failure to achieve its goals could have a
material adverse effect on CMS Energy's and Consumers' liquidity and operations.

     CMS Energy continues to explore financing opportunities to supplement its
financial plan. These potential opportunities include: refinancing its bank
credit facilities, entering into leasing arrangements and refinancing and/or
issuing new capital markets debt, preferred stock and/or common equity. CMS
Energy cannot guarantee the capital market's acceptance of its securities or
predict the impact of factors beyond its control, such as actions of rating
agencies. If CMS Energy is unable to access bank financing or the capital
markets to incur or refinance indebtedness, there could be a material adverse
effect upon its liquidity and operations.

     Similarly, Consumers currently plans to seek funds through the capital
markets and commercial lenders. Entering into new financings is subject in part
to capital market receptivity to utility industry securities in general and to
Consumers' securities issuances in particular. Consumers cannot guarantee the
capital market's acceptance of its securities or predict the impact of factors
beyond its control, such as actions of rating agencies. If Consumers is unable
to access bank financing or the capital markets to incur or refinance
indebtedness, there could be a material adverse effect upon its liquidity and
operations.

     Certain of CMS Energy's securities and those of its affiliates, including
Consumers, are rated by various credit rating agencies. Any reduction or
withdrawal of one or more of its credit ratings could have a material adverse
impact on CMS Energy's ability to access capital on acceptable terms and
maintain commodity lines of credit and could make its cost of borrowing higher.
If it is unable to maintain commodity lines of credit, CMS Energy may have to
post collateral or make prepayments to certain of its suppliers pursuant to
existing contracts with them. Further, any adverse developments to Consumers,
which provides dividends to CMS Energy, that result in a lowering of Consumers'
credit ratings could have an adverse effect on CMS Energy's credit ratings. CMS
Energy and Consumers cannot assure you that any of their current ratings will
remain in effect for any given period of time or that a rating will not be
lowered or withdrawn entirely by a rating agency.

     On August 2, 2005, the IRS issued Revenue Ruling 2005-53 and regulations to
provide guidance with respect to the use of the "simplified service cost" method
of tax accounting. CMS Energy and Consumers use this tax accounting method,
generally allowed by the IRS under section 263A of the Internal Revenue Code,
with respect to the allocation of certain corporate overheads to the tax basis
of self-constructed utility assets. Under the IRS guidance, significant issues
with respect to the application of this method remain unresolved and subject to
dispute. However, the effect of the IRS's position may be to require CMS Energy
either (1) to repay a portion of previously received tax benefits, or (2) to add
back to taxable income, half in each of 2005 and 2006, a significant

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portion of previously deducted overheads. The impact of this matter on future
earnings, cash flows, or present NOL carryforwards remains uncertain, but could
be material. CMS Energy and Consumers have recorded a reduction in NOL
carryforwards of $359 million in 2005, and a corresponding reduction in deferred
taxes related to property, to reflect the estimated 2005 effect of the new
regulation. CMS Energy and Consumers cannot predict the outcome of this matter.

PERIODIC REVIEWS OF THE VALUES OF CMS ENERGY'S AND CONSUMERS' ASSETS COULD
RESULT IN ADDITIONAL ACCOUNTING CHARGES SUCH AS THE RECENT ASSET IMPAIRMENT
CHARGES THEY TOOK RELATING TO THEIR INTEREST IN THE MCV PARTNERSHIP.

     CMS Energy and Consumers are required by GAAP to periodically review the
carrying value of their assets, including those that may be sold. Market
conditions, the operational characteristics of their assets and other factors
could result in recording additional impairment charges for their assets, which
could have an adverse effect on their stockholders' equity and their access to
additional financing. In addition, they may be required to record impairment
charges and/or foreign currency translation losses at the time they sell assets,
depending on the sale prices they are able to secure and other factors.

     The MCV Partnership's costs of producing electricity are tied to the price
of natural gas, but its revenues do not vary with changes in the price of
natural gas. In 2005, NYMEX forward natural gas price forecasts for the years
2005 through 2010 increased substantially. Additionally, other independent
natural gas long-term forward price forecasting organizations indicated their
intention to raise their forecasts for the price of natural gas generally over
the entire long-term forecast horizon beyond 2010. CMS Energy's and Consumers'
analysis and assessment of this information suggested that forward natural gas
prices for the period from 2006 through 2010 could average approximately $9 per
mcf. Further, this information indicated that natural gas prices could average
approximately $6.50 per mcf over the long term beyond 2010. As a result, in
2005, the MCV Partnership reevaluated the economics of operating the MCV
Facility and determined that an impairment analysis, considering revised forward
natural gas price assumptions, was required. In its impairment analysis, the MCV
Partnership determined the fair value of its fixed assets by discounting a set
of probability-weighted streams of future operating cash flows at a 4.3 percent
risk free interest rate. The carrying value of the MCV Partnership's fixed
assets exceeded the estimated fair value, resulting in an impairment charge of
$1.159 billion to recognize the reduction in fair value of the MCV Facility's
fixed assets. As a result, Consumers' 2005 net income was reduced by $369
million after considering tax effects and minority interest. The MCV
Partnership's fixed assets, which are included on Consumers' Consolidated
Balance Sheets and reported by CMS Energy under the Enterprises business
segment, after reflecting the impairment charge, are valued at $224 million at
December 31, 2005.

     The impairment of the MCV Facility, and any potential future impairment of
the MCV Facility, will likely decrease the amount of equity investment
recognized in future electric and gas rate orders. Lower equity investment may
result in a reduced revenue requirement. However, CMS Energy and Consumers
cannot predict the outcome of any future rate cases, which may be lower or
higher based on several factors, including the amount of equity investment and
related risk.

     If natural gas prices remain at present levels or increase, the operations
of the MCV Facility would be adversely affected and could result in the MCV
Partnership failing to meet its obligations under the sale and leaseback
transactions and other contracts and could result in a potential impairment of
the FMLP. At December 31, 2005, Consumers' investment in the FMLP was $235
million.

     Consumers' 49 percent interest in the MCV Partnership is held through
Consumers' wholly-owned subsidiary, CMS Midland. The severe adverse change in
the anticipated economics of the MCV Partnership operations discussed herein
also led to the decision to impair certain assets carried on the balance sheet
of CMS Midland. These assets represented interest capitalized during the
construction of the MCV Facility, which were being amortized over the life of
the MCV Facility. In the third quarter of 2005, Consumers recorded an impairment
charge of $25 million ($16 million, net of tax) to reduce the carrying amount of
these assets to zero.

     The total of the CMS Midland impairment and the MCV Partnership impairment
discussed above is $1.184 billion, before tax, and $385 million net of taxes and
minority interest.

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<PAGE>

THE COMBINED EFFECTS OF SUBSTANTIALLY HIGHER NATURAL GAS PRICES, RESTRICTIONS ON
CONSUMERS' ABILITY TO ISSUE FIRST MORTGAGE BONDS AND POSSIBLE POWER PURCHASE
SUPPLY COST RECOVERY DELAYS MAY HAVE A NEGATIVE EFFECT ON CONSUMERS' SHORT-TERM
LIQUIDITY.

     Natural gas prices continue to increase substantially. Although Consumers'
natural gas purchases are recoverable from its utility customers, as gas prices
increase, the amount it pays for natural gas stored as inventory will require
additional liquidity due to the timing of the cost recoveries from its
customers. Due to the high natural gas prices, Consumers' ability to collect
accounts receivable from its gas customers may be negatively impacted. In
addition, if natural gas prices increase or stay at current levels, Consumers
will require significant additional liquidity in the summer of 2006 to fill its
gas storage facilities in preparation for the 2006-2007 heating season.

     Due to the adverse impact of the MCV Partnership asset impairment charge
recorded in September 2005, Consumers' ability to issue FMB as primary
obligations or as collateral for financing is expected to be limited to $298
million through September 30, 2006. FMB have been a primary source of financing
for Consumers. After September 30, 2006, Consumers' ability to issue FMB in
excess of $298 million is based on achieving a two-times FMB interest coverage
ratio.

     Consumers is entitled to recover its reasonably and prudently incurred
power supply costs pursuant to the PSCR process. In September 2005, Consumers
submitted its 2006 PSCR plan filing to the MPSC. In November 2005, it submitted
an amended 2006 PSCR plan to the MPSC to include higher estimates for certain
transmission and coal supply costs. In December 2005, the MPSC issued an order
that temporarily excludes the increased portion of these costs from Consumers'
PSCR charge, which began in January 2006. The order also includes a one mill per
kWh reduction in the PSCR charge. To the extent that Consumers incurs and is
unable to collect these costs in a timely manner, its cash flows from electric
utility operations will be affected negatively. Consumers cannot predict the
outcome of the PSCR proceeding.

CMS ENERGY AND CONSUMERS MAY BE ADVERSELY AFFECTED BY REGULATORY INVESTIGATIONS
AND A LAWSUIT REGARDING "ROUND-TRIP" TRADING BY CMS MST AS WELL AS CIVIL
LAWSUITS REGARDING PRICING INFORMATION THAT CMS MST AND CMS FIELD SERVICES
PROVIDED TO MARKET PUBLICATIONS.

     As a result of round-trip trading transactions (simultaneous, prearranged
commodity trading transactions in which energy commodities were sold and
repurchased at the same price) at CMS MST, CMS Energy is under investigation by
the DOJ. CMS Energy has also received subpoenas from U.S. Attorneys' Offices
regarding investigations of those trades. In addition, CMS Energy, Consumers and
certain officers and directors of CMS Energy and its affiliates, have been named
in numerous securities class action lawsuits by individuals who allege that they
purchased CMS Energy securities during a purported class period. The cases have
been consolidated into a single lawsuit. The consolidated lawsuit generally
seeks unspecified damages based on allegations that the defendants violated
United States securities laws and regulations by making allegedly false and
misleading statements about CMS Energy's business and financial condition,
particularly with respect to revenues and expenses recorded in connection with
round-trip trading by CMS MST. In January 2005, a motion was granted dismissing
Consumers and three of the individual defendants, but the court denied the
motions to dismiss for CMS Energy and the 13 remaining individual defendants.
Plaintiffs filed a motion for class certification on April 15, 2005 and an
amended motion for class certification on June 20, 2005. On November 29, 2005,
the court denied a further motion to dismiss filed by CMS Energy and denied a
motion by the plaintiffs for partial summary judgment.

     In March 2004, the SEC approved a cease-and-desist order settling an
administrative action against CMS Energy relating to round-trip trading. The
order did not assess a fine and CMS Energy neither admitted nor denied the
order's findings.

     CMS Energy has notified appropriate regulatory and governmental agencies
that some employees at CMS MST and CMS Field Services (now Cantera Gas Company)
appeared to have provided inaccurate information regarding natural gas trades to
various energy industry publications which compile and report index prices. CMS
Energy is cooperating with an ongoing investigation by the DOJ regarding this
matter. On November 25, 2003, the CFTC issued a settlement order regarding this
matter. CMS MST and CMS Field Services agreed to pay a

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<PAGE>

fine to the CFTC totaling $16 million. CMS Energy neither admitted nor denied
the findings of the CFTC in the settlement order. The CFTC filed a civil
injunctive action against two former CMS Field Services employees in Oklahoma
federal district court on February 1, 2005. The action alleges the two engaged
in reporting false natural gas trade information, and the action seeks to enjoin
those acts, compel compliance with the Commodities Exchange Act and impose
monetary penalties. CMS Energy is currently advancing legal defense costs to the
two individuals in accordance with existing indemnification policies.

     CMS Energy has also been named as a defendant in a number of gas industry
civil lawsuits regarding inaccurate gas trade reporting that include claims
alleging manipulation of NYMEX natural gas futures and options prices,
price-fixing conspiracies and artificial inflation of natural gas retail prices
in California, Kansas and Tennessee.

     CMS Energy and Consumers cannot predict the outcome of the DOJ
investigations and the lawsuits. It is possible that the outcome in one or more
of the investigations or the lawsuits could adversely affect CMS Energy's and
Consumers' financial condition, liquidity or results of operations.

CMS ENERGY AND CONSUMERS MAY BE NEGATIVELY IMPACTED BY THE RESULTS OF AN
EMPLOYEE BENEFIT PLAN LAWSUIT.

     CMS Energy and Consumers are defendants, along with CMS MST and certain
named and unnamed officers and directors, in two lawsuits brought as purported
class actions on behalf of participants and beneficiaries of their 401(k) plan.
The two cases, filed in July 2002 in the United States District Court for the
Eastern District of Michigan, were consolidated by the trial judge and an
amended and consolidated complaint has been filed. Plaintiffs allege breaches of
fiduciary duties under ERISA and seek restitution on behalf of the plan with
respect to a decline in value of the shares of CMS Energy Common Stock held in
the plan. The plaintiffs also seek other equitable relief and legal fees. The
judge has conditionally granted plaintiffs' motion for class certification. A
trial date has not been set, but is expected to be no earlier than mid-2006 in
the absence of an intervening settlement of the lawsuits. Settlement
negotiations among counsel for the parties and CMS Energy's fiduciary insurance
carrier are ongoing. In the absence of such a settlement, CMS Energy and
Consumers will defend themselves vigorously in this litigation but cannot
predict its outcome.

     It is possible that an adverse outcome in this lawsuit could adversely
affect CMS Energy's and Consumers' financial condition, liquidity or results of
operations.

REGULATORY CHANGES AND OTHER DEVELOPMENTS HAVE RESULTED AND COULD CONTINUE TO
RESULT IN INCREASED COMPETITION IN THE DOMESTIC ENERGY BUSINESS. GENERALLY,
INCREASED COMPETITION THREATENS MARKET SHARE IN CERTAIN SEGMENTS OF CMS ENERGY'S
BUSINESS AND CAN REDUCE ITS AND CONSUMERS' PROFITABILITY.

     Pursuant to the Customer Choice Act, as of January 1, 2002, all electric
customers in Michigan had the choice of buying electric generation service from
Consumers or an alternative electric supplier. Consumers had experienced, and
could experience in the future, a significant increase in competition for
generation services due to the introduction of ROA. At December 31, 2005,
alternative electric suppliers were providing 552 MW of generation service to
ROA customers. This amount represents 7 percent of Consumers' total distribution
load. It is difficult to predict the total amount of electric supply load that
may be lost to competitor suppliers in the future.

ELECTRIC INDUSTRY REGULATION COULD ADVERSELY AFFECT CMS ENERGY'S AND CONSUMERS'
BUSINESS, INCLUDING THEIR ABILITY TO RECOVER COSTS FROM THEIR CUSTOMERS.

     Federal and state regulation of electric utilities has changed dramatically
in the last two decades and could continue to change over the next several
years. These changes could adversely affect CMS Energy's and Consumers'
business, financial condition and profitability.

     There are multiple proceedings pending before the FERC involving
transmission rates, regional transmission organizations and electric bulk power
markets and transmission. FERC is also reviewing the standards under which
electric utilities are allowed to participate in wholesale power markets without
price restrictions. CMS

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Energy and Consumers cannot predict the impact of these electric industry
restructuring proceedings on their financial position, liquidity or results of
operations.

CMS ENERGY AND CONSUMERS COULD INCUR SIGNIFICANT CAPITAL EXPENDITURES TO COMPLY
WITH ENVIRONMENTAL STANDARDS AND FACE DIFFICULTY IN RECOVERING THESE COSTS ON A
CURRENT BASIS.

     CMS Energy, Consumers, and their subsidiaries are subject to costly and
increasingly stringent environmental regulations. They expect that the cost of
future environmental compliance, especially compliance with clean air and water
laws, will be significant.

     In 1998, the EPA issued regulations requiring the State of Michigan to
further limit nitrogen oxide emissions at coal-fired electric plants. The EPA
and State of Michigan regulations require Consumers to make significant capital
expenditures estimated to be $815 million. As of December 2005, Consumers has
incurred $605 million in capital expenditures to comply with these regulations
and anticipates that the remaining $210 million of capital expenditures will be
made in 2006 through 2011. These expenditures include installing selective
catalytic reduction technology at four of its coal-fired electric plants. In
addition to modifying coal-fired electric plants, Consumers compliance plan
includes the use of nitrogen oxide emission allowances until all of the control
equipment is operational in 2011. The nitrogen oxide emission allowance annual
expense is projected to be $10 million per year, which Consumers expects to
recover from customers through the PSCR process. The projected annual expense is
based on market price forecasts and forecasts of regulatory provisions, known as
progressive flow control, that restrict the usage in any given year of
allowances banked from previous years.

     The EPA recently adopted a Clean Air Interstate Rule that requires
additional coal-fired electric plant emission controls for nitrogen oxides and
sulfur dioxide. The rule involves a two-phase program to reduce emissions of
sulfur dioxide by 71 percent and nitrogen oxides by 63 percent by 2015. The
final rule will require that Consumers run its selective catalytic control
technology units year-round beginning in 2009 and may require that it purchase
additional nitrogen oxide allowances beginning in 2009. In addition to the
selective catalytic control technology installed to meet the nitrogen oxide
standards, Consumers' current plan includes installation of flue gas
desulfurization scrubbers. The scrubbers are to be installed by 2014 to meet the
Phase I reduction requirements of the Clean Air Interstate Rule at costs similar
to those to comply with nitrogen oxide standards.

     In May 2005, the EPA issued the Clean Air Mercury Rule, which requires
initial reductions of mercury emissions from coal-fired electric power plants by
2010 and further reductions by 2018. While the industry has not reached a
consensus on the technical methods for curtailing mercury emissions, Consumers'
capital and operating costs for mercury emissions reductions are expected to be
significantly less than what was required for selective catalytic reduction
technology used for nitrogen oxide compliance.

     In August 2005, the MDEQ filed a Motion to Intervene in a court challenge
to certain aspects of EPA's Clean Air Mercury Rule, asserting that the rule is
inadequate. The MDEQ has not indicated the direction that it will pursue to meet
or exceed the EPA requirements through a state rulemaking. Consumers is actively
participating in dialog with the MDEQ regarding potential paths for controlling
mercury emissions and meeting the EPA requirements. In October 2005, the EPA
announced it would reconsider certain aspects of the Clean Air Mercury Rule.
Consumers cannot predict the outcome of this proceeding.

     Several legislative proposals have been introduced in the United States
Congress that would require reductions in emissions of greenhouse gases;
however, none have yet been enacted. CMS Energy and Consumers cannot predict
whether any federal mandatory greenhouse gas emission reduction rules ultimately
will be enacted, or the specific requirements of any of these rules.

     To the extent that greenhouse gas emission reduction rules come into
effect, the mandatory emissions reduction requirements could have far-reaching
and significant implications for the energy sector. CMS Energy and Consumers
cannot estimate the potential effect of federal or state level greenhouse gas
policy on their future consolidated results of operations, cash flows, or
financial position due to the uncertain nature of the policies at this time.
However, CMS Energy and Consumers stay abreast of and engage in greenhouse gas
policy developments and will continue to assess and respond to the potential
implications on their business operations.

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<PAGE>

     These and other required environmental expenditures, if not recovered from
customers in Consumers' rates, may require CMS Energy and/or Consumers to seek
significant additional financing to fund these expenditures and could strain
their cash resources.

CMS ENERGY'S AND CONSUMERS' REVENUES AND RESULTS OF OPERATIONS ARE SUBJECT TO
RISKS THAT ARE BEYOND THEIR CONTROL, INCLUDING BUT NOT LIMITED TO FUTURE
TERRORIST ATTACKS OR RELATED ACTS OF WAR.

     The cost of repairing damage to CMS Energy's and Consumers' facilities due
to storms, natural disasters, wars, terrorist acts and other catastrophic
events, in excess of insurance recoveries and reserves established for these
repairs, may adversely impact their results of operations, financial condition
and cash flows. The occurrence or risk of occurrence of future terrorist
activity and the high cost or potential unavailability of insurance to cover
this terrorist activity may impact their results of operations and financial
condition in unpredictable ways. These actions could also result in disruptions
of power and fuel markets. In addition, their natural gas distribution system
and pipelines could be directly or indirectly harmed by future terrorist
activity.

CONSUMERS' OWNERSHIP OF A NUCLEAR GENERATING FACILITY CREATES RISK RELATING TO
NUCLEAR ENERGY.

     Consumers owns the Palisades nuclear power plant and is, therefore, subject
to the risks of nuclear generation, including the risks associated with the
operation of plant facilities and the storage and disposal of spent fuel and
other radioactive waste. The NRC has broad authority under federal law to impose
licensing and safety-related requirements for the operation of nuclear
generation facilities. In the event of non-compliance, the NRC has the authority
to impose fines or shut down a unit, or both, depending upon its assessment of
the severity of the situation, until compliance is achieved. In addition, if a
serious nuclear incident were to occur at Consumers' plant, it could harm
Consumers' results of operations and financial condition. A major incident at a
nuclear facility anywhere in the world could cause the NRC to limit or prohibit
the operation or licensing of any domestic nuclear unit.

     In December 2005, Consumers announced plans to sell the Palisades plant in
a competitive bid process expected to lead to a sale in 2007.

CONSUMERS CURRENTLY UNDERRECOVERS IN ITS RATES ITS PAYMENTS TO THE MCV
PARTNERSHIP FOR CAPACITY AND ENERGY, AND IS ALSO EXPOSED TO FUTURE CHANGES IN
THE MCV PARTNERSHIP'S FINANCIAL CONDITION THROUGH ITS EQUITY AND LESSOR
INVESTMENTS.

     The MCV PPA expires in 2025. Under the MCV PPA, variable energy payments to
the MCV Partnership are based on the cost of coal burned at Consumers' coal
plants and its operation and maintenance expenses. However, the MCV
Partnership's costs of producing electricity are tied to the cost of natural
gas. Natural gas prices have increased substantially in recent years and
throughout 2005. In 2005, the MCV Partnership reevaluated the economics of
operating the MCV Facility and recorded an impairment. For additional details on
the impairment of the MCV Facility, see "Periodic reviews of the values of CMS
Energy's and Consumers' assets could result in additional accounting charges
such as the recent asset impairment charges they took relating to their interest
in the MCV Partnership" above.

     Further, the cost that Consumers incurs under the MCV PPA exceeds the
recovery amount allowed by the MPSC. Underrecoveries of capacity and fixed
energy payments totaled $59 million in 2005. Consumers estimates underrecoveries
of $55 million in 2006 and $39 million in 2007. After September 15, 2007, it
expects to claim relief under the regulatory out provision in the MCV PPA,
thereby limiting its capacity and fixed energy payments to the MCV Partnership
to the amounts that it collects from its customers. The MCV Partnership has
indicated that it may take issue with Consumers' exercise of the regulatory out
clause after September 15, 2007. Consumers believes that the clause is valid and
fully effective, but cannot assure that it will prevail in the event of a
dispute. The MPSC's future actions on the capacity and fixed energy payments
recoverable from customers subsequent to September 15, 2007 may affect
negatively the financial performance of the MCV Partnership.

     In January 2005, Consumers implemented the RCP. The underlying agreement
for the RCP between Consumers and the MCV Partnership extends through the term
of the MCV PPA. However, either party may terminate that agreement under certain
conditions. In February 2005, a group of intervenors in the RCP case filed

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for rehearing of the MPSC order approving the RCP. The Attorney General also
filed an appeal with the Michigan Court of Appeals. Consumers cannot predict the
outcome of these matters.

     CMS Energy and Consumers cannot estimate, at this time, the impact of these
issues on Consumers' future earnings or cash flow from its interest in the MCV
Partnership. The ability to develop a new long-term strategy with respect to the
MCV Facility, the future price of natural gas and an MPSC decision related to
Consumers' recovery of capacity payments are the three most significant
variables in the analysis of the MCV Partnership's future financial performance.
It is not presently possible to predict the success of the ability to develop a
new long -- term strategy with respect to the MCV Facility, the future price of
natural gas, or the actions of the MPSC in 2007 or later. For these reasons, at
this time CMS Energy and Consumers cannot predict the impact of these issues on
Consumers' future earnings or cash flows or on the value of its equity interest
in the MCV Partnership and CMS Energy's lessor interest in the FMLP.

CONSUMERS' ENERGY RISK MANAGEMENT STRATEGIES MAY NOT BE EFFECTIVE IN MANAGING
FUEL AND ELECTRICITY PRICING RISKS, WHICH COULD RESULT IN UNANTICIPATED
LIABILITIES TO CONSUMERS OR INCREASED VOLATILITY OF ITS EARNINGS.

     Consumers is exposed to changes in market prices for natural gas, coal,
electricity and emission credits. Prices for natural gas, coal, electricity and
emission credits may fluctuate substantially over relatively short periods of
time and expose Consumers to commodity price risk. A substantial portion of
Consumers' operating expenses for its plants consists of the costs of obtaining
these commodities. Consumers manages these risks using established policies and
procedures, and it may use various contracts to manage these risks, including
swaps, options, futures and forward contracts. No assurance can be made that
these strategies will be successful in managing Consumers' pricing risk, or that
they will not result in net liabilities to Consumers as a result of future
volatility in these markets.

     Natural gas prices in particular have historically been volatile. To manage
market risks associated with the volatility of natural gas prices, the MCV
Partnership maintains a gas hedging program. The MCV Partnership enters into
natural gas futures contracts, option contracts and over-the-counter swap
transactions in order to hedge against unfavorable changes in the market price
of natural gas in future months when gas is expected to be needed. These
financial instruments are being used principally to secure anticipated natural
gas requirements necessary for projected electric and steam sales, and to lock
in sales prices of natural gas previously obtained in order to optimize the MCV
Partnership's existing gas supply, storage and transportation arrangements.
Consumers also routinely enters into contracts to offset its positions, such as
hedging exposure to the risks of demand, market effects of weather and changes
in commodity prices associated with its gas distribution business. These
positions are taken in conjunction with the GCR mechanism, which allows
Consumers to recover prudently incurred costs associated with those positions.
However, neither Consumers nor the MCV Partnership always hedges the entire
exposure of its operations from commodity price volatility. Furthermore, the
ability to hedge exposure to commodity price volatility depends on liquid
commodity markets. As a result, to the extent the commodity markets are
illiquid, Consumers may not be able to execute its risk management strategies,
which could result in greater open positions than preferred at a given time. To
the extent that open positions exist, fluctuating commodity prices can improve
or diminish CMS Energy's and Consumers' financial results and financial
position.

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                       ITEM 1B. UNRESOLVED STAFF COMMENTS

     Not applicable.

                               ITEM 2. PROPERTIES

     Descriptions of CMS Energy's and Consumers' properties are found in the
following sections of Item 1, all of which are incorporated by reference in this
Item 2:

     - BUSINESS -- GENERAL -- Consumers -- Consumers' Properties -- General;

     - BUSINESS -- BUSINESS SEGMENTS -- Consumers Electric Utility -- Electric
       Utility Properties;

     - BUSINESS -- BUSINESS SEGMENTS -- Consumers Gas Utility -- Gas Utility
       Properties;

     - BUSINESS -- BUSINESS SEGMENTS -- Natural Gas Transmission -- Natural Gas
       Transmission Properties;

     - BUSINESS -- BUSINESS SEGMENTS -- Independent Power
       Production -- Independent Power Production Properties; and

     - BUSINESS -- BUSINESS SEGMENTS -- International Energy Distribution.

                           ITEM 3. LEGAL PROCEEDINGS

     CMS Energy, Consumers and some of their subsidiaries and affiliates are
parties to certain routine lawsuits and administrative proceedings incidental to
their businesses involving, for example, claims for personal injury and property
damage, contractual matters, various taxes, and rates and licensing. For
additional information regarding various pending administrative and judicial
proceedings involving regulatory, operating and environmental matters, see ITEM
1. BUSINESS -- CMS ENERGY AND CONSUMERS REGULATION, both CMS Energy's and
Consumers' ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS and both CMS Energy's
and Consumers' ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS.

CMS ENERGY

SEC REQUEST

     On August 5, 2004, CMS Energy received a request from the SEC that CMS
Energy voluntarily produce documents and data relating to the SEC's inquiry into
payments made to the officials or relatives of officials of the government of
Equatorial Guinea. On August 17, 2004, CMS Energy submitted its response,
advising the SEC of the information and documentation it had available. On March
8, 2005, CMS Energy received a request from the SEC that CMS Energy voluntarily
produce certain of such documents. CMS Energy has provided responsive documents
to the SEC and will continue to provide such documents as it reviews its
electronic records in further response to the SEC's request. The SEC
subsequently issued a formal order of private investigation on this matter and
on August 1, 2005, CMS Energy and several other companies who have conducted
business in Equatorial Guinea received subpoenas from the SEC to provide
documents regarding payments made to officials or relatives of officials of the
government of Equatorial Guinea. CMS Energy is cooperating and has been and will
continue to produce documents responsive to the subpoena.

GAS INDEX PRICE REPORTING LITIGATION

     In August 2003, Cornerstone Propane Partners, L.P. (Cornerstone) filed a
putative class action complaint in the United States District Court for the
Southern District of New York against CMS Energy and dozens of other

                                        36
<PAGE>

energy companies. The Cornerstone complaint was subsequently consolidated with
two similar complaints filed by other plaintiffs. The plaintiffs filed a
consolidated complaint on January 20, 2004. The consolidated complaint alleges
that false natural gas price reporting by the defendants manipulated the prices
of NYMEX natural gas futures and options. The complaint contains two counts
under the Commodity Exchange Act, one for manipulation and one for aiding and
abetting violations. On September 30, 2005, the court entered an order granting
plaintiffs' motion for class certification. Plaintiffs are seeking to have the
class recover actual damages and costs, including attorneys fees. CMS Energy is
no longer a defendant; however, CMS MST and CMS Field Services are named as
defendants. (CMS Energy sold CMS Field Services to Cantera Natural Gas, LLC,
which changed the name of CMS Field Services to Cantera Gas Company. CMS Energy
is required to indemnify Cantera Natural Gas, LLC with respect to this action.)
Settlement negotiations among counsel for the parties are ongoing. In the
absence of such a settlement, CMS MST and CMS Field Services will defend
themselves vigorously in this litigation but cannot predict its outcome.

     In a similar but unrelated matter, Texas-Ohio Energy, Inc. filed a putative
class action lawsuit in the United States District Court for the Eastern
District of California in November 2003 against a number of energy companies
engaged in the sale of natural gas in the United States (including CMS Energy).
The complaint alleged defendants entered into a price-fixing scheme by engaging
in activities to manipulate the price of natural gas in California. The
complaint alleged violations of the federal Sherman Act, the California
Cartwright Act, and the California Business and Professions Code relating to
unlawful, unfair and deceptive business practices. The complaint sought both
actual and exemplary damages for alleged overcharges, attorneys fees and
injunctive relief regulating defendants' future conduct relating to pricing and
price reporting. In April 2004, a Nevada Multidistrict Litigation (MDL) Panel
ordered the transfer of the Texas-Ohio case to a pending MDL matter in the
Nevada federal district court that at the time involved seven complaints
originally filed in various state courts in California. These complaints make
allegations similar to those in the Texas-Ohio case regarding price reporting,
although none contain a federal Sherman Act claim. In November 2004, those seven
complaints, as well as a number of others that were originally filed in various
state courts in California and subsequently transferred to the MDL proceeding,
were remanded back to California state court. The Texas-Ohio case remained in
Nevada federal district court, and defendants, with CMS Energy joining, filed a
motion to dismiss. The court issued an order granting the motion to dismiss on
April 8, 2005 and entered a judgment in favor of the defendants on April 11,
2005. Texas-Ohio has appealed the dismissal to the Ninth Circuit Court of
Appeals.

     Three federal putative class actions, Fairhaven Power Company v. Encana
Corp. et al., Utility Savings & Refund Services LLP v. Reliant Energy Resources
Inc. et al., and Abelman Art Glass v. Encana Corp. et al., all of which make
allegations similar to those in the Texas-Ohio case regarding price manipulation
and seek similar relief, were originally filed in the United States District
Court for the Eastern District of California in September 2004, November 2004
and December 2004, respectively. The Fairhaven and Abelman Art Glass cases also
include claims for unjust enrichment and a constructive trust. The three
complaints were filed against CMS Energy and many of the other defendants named
in the Texas-Ohio case. In addition, the Utility Savings case names CMS MST and
Cantera Resources Inc. (Cantera Resources Inc. is the parent of Cantera Natural
Gas, LLC and CMS Energy is required to indemnify Cantera Natural Gas, LLC and
Cantera Resources Inc. with respect to these actions.)

     The Fairhaven, Utility Savings and Abelman Art Glass cases have been
transferred to the MDL proceeding, where the Texas-Ohio case was pending.
Pursuant to stipulation by the parties and court order, defendants were not
required to respond to the Fairhaven, Utility Savings and Abelman Art Glass
complaints until the court ruled on defendants' motion to dismiss in the
Texas-Ohio case. Plaintiffs subsequently filed a consolidated class action
complaint alleging violations of federal and California antitrust laws.
Defendants filed a motion to dismiss, arguing that the consolidated complaint
should be dismissed for the same reasons as the Texas-Ohio case. The court
issued an order granting the motion to dismiss on December 19, 2005 and entered
judgment in favor of defendants on December 23, 2005. Plaintiffs have appealed
the dismissal to the Ninth Circuit Court of Appeals.

     Commencing in or about February 2004, 15 state law complaints containing
allegations similar to those made in the Texas-Ohio case, but generally limited
to the California Cartwright Act and unjust enrichment, were filed in various
California state courts against many of the same defendants named in the federal
price

                                        37
<PAGE>

manipulation cases discussed above. In addition to CMS Energy, CMS MST is named
in all of the 15 state law complaints. Cantera Gas Company and Cantera Natural
Gas, LLC (erroneously sued as Cantera Natural Gas, Inc.) are named in all but
one complaint.

     In February 2005, these 15 separate actions, as well as nine other similar
actions that were filed in California state court but do not name CMS Energy or
any of its former or current subsidiaries, were ordered coordinated with pending
coordinated proceedings in the San Diego Superior Court. The 24 state court
complaints involving price reporting were coordinated as Natural Gas Antitrust
Cases V. Plaintiffs in Natural Gas Antitrust Cases V were ordered to file a
consolidated complaint, but a consolidated complaint was filed only for the two
putative class action lawsuits. On April 8, 2005, defendants filed a demurrer to
the master class action complaint and the individual complaints and on May 13,
2005, plaintiffs filed a memorandum of points and authorities in opposition to
defendants' federal preemption demurrer and motion to strike. Pursuant to a
ruling dated June 29, 2005, the demurrer was overruled and the motion to strike
was denied.

     Samuel D. Leggett, et al v. Duke Energy Corporation, et al, a class action
complaint brought on behalf of retail and business purchasers of natural gas in
Tennessee, was filed in the Chancery Court of Fayette County, Tennessee in
January 2005. The complaint contains claims for violations of the Tennessee
Trade Practices Act based upon allegations of false reporting of price
information by defendants to publications that compile and publish indices of
natural gas prices for various natural gas hubs. The complaint seeks statutory
full consideration damages and attorneys fees and injunctive relief regulating
defendants' future conduct. The defendants include CMS Energy, CMS MST and CMS
Field Services. On March 7, 2005, defendants removed the case to the United
States District Court for the Western District of Tennessee, Western Division,
and they filed a motion on May 20, 2005 to transfer the case to the MDL
proceeding in Nevada. On April 6, 2005, plaintiffs filed a motion to remand the
case back to the Chancery Court in Tennessee. On August 10, 2005, certain
defendants, including CMS MST, filed a motion to dismiss, and CMS Energy and CMS
Field Services filed a motion to dismiss for lack of personal jurisdiction.
Plaintiffs have opposed the motions to dismiss. An order transferring the case
to the MDL proceeding in Nevada was issued on or about August 11, 2005, and the
motions to dismiss remain pending.

     On November 20, 2005, CMS MST was served with a summons and complaint which
named CMS Energy, CMS MST and CMS Field Services as defendants in a new putative
class action filed in Kansas state court, Learjet, Inc., et al. v. Oneok, Inc.,
et al. Similar to the other actions that have been filed, the complaint alleges
that during the putative class period, January 1, 2000 through October 31, 2002,
defendants engaged in a scheme to violate the Kansas Restraint of Trade Act by
knowingly reporting false or inaccurate information to the publications, thereby
affecting the market price of natural gas. Plaintiffs, who allege they purchased
natural gas from defendants and other for their facilities, are seeking
statutory full consideration damages consisting of the full consideration paid
by plaintiffs for natural gas. On December 7, 2005, the case was removed to the
United States District Court for the District of Kansas and later that month a
motion was filed to transfer the case to the MDL proceeding in Nevada. On
January 6, 2006, plaintiffs filed a motion to remand the case to Kansas state
court. On January 23, 2006, a conditional transfer order transferring the case
to the MDL proceeding in Nevada was issued. On February 7, 2006, plaintiffs
filed an opposition to the conditional transfer order.

     CMS Energy and the other CMS defendants will defend themselves vigorously
against these matters but cannot predict their outcome.

ROUND-TRIP TRADING INVESTIGATIONS

     During the period of May 2000 through January 2002, CMS MST engaged in
simultaneous, prearranged commodity trading transactions in which energy
commodities were sold and repurchased at the same price. These so called
round-trip trades had no impact on previously reported consolidated net income,
earnings per share or cash flows, but had the effect of increasing operating
revenues, operating expenses, accounts receivable, accounts payable and reported
trading volumes.

     CMS Energy is cooperating with an investigation by the DOJ concerning
round-trip trading, which the DOJ commenced in May 2002. CMS Energy is unable to
predict the outcome of this matter and what effect, if any, this

                                        38
<PAGE>

investigation will have on its business. In March 2004, the SEC approved a
cease-and-desist order settling an administrative action against CMS Energy
related to round-trip trading. The order did not assess a fine and CMS Energy
neither admitted to nor denied the order's findings. The settlement resolved the
SEC investigation involving CMS Energy and CMS MST. Also in March 2004, the SEC
filed an action against three former employees related to round-trip trading at
CMS MST. One of the individuals has settled with the SEC. CMS Energy is
currently advancing legal defense costs for the remaining two individuals in
accordance with existing indemnification policies.

CMS ENERGY AND CONSUMERS

EMPLOYMENT RETIREMENT INCOME SECURITY ACT CLASS ACTION LAWSUITS

     CMS Energy is a named defendant, along with Consumers, CMS MST, and certain
named and unnamed officers and directors, in two lawsuits brought as purported
class actions on behalf of participants and beneficiaries of the CMS Employees'
Savings and Incentive Plan (the Plan). The two cases, filed in July 2002 in
United States District Court for the Eastern District of Michigan, were
consolidated by the trial judge and an amended consolidated complaint was filed.
Plaintiffs allege breaches of fiduciary duties under ERISA and seek restitution
on behalf of the Plan with respect to a decline in value of the shares of CMS
Energy Common Stock held in the Plan. Plaintiffs also seek other equitable
relief and legal fees. The judge has conditionally granted plaintiffs' motion
for class certification. A trial date has not been set, but is expected to be no
earlier than mid-2006 in the absence of an intervening settlement of the
lawsuits. Settlement negotiations among counsel for the parties and CMS Energy's
fiduciary insurance carrier are ongoing. In the absence of such a settlement,
CMS Energy and Consumers will defend themselves vigorously in this litigation
but cannot predict its outcome.

SECURITIES CLASS ACTION LAWSUITS

     Beginning on May 17, 2002, a number of complaints were filed against CMS
Energy, Consumers, and certain officers and directors of CMS Energy and its
affiliates, including but not limited to Consumers which, while established,
operated and regulated as a separate legal entity and publicly traded company,
shares a parallel Board of Directors with CMS Energy. The complaints were filed
as purported class actions in the United States District Court for the Eastern
District of Michigan, by shareholders who allege that they purchased CMS
Energy's securities during a purported class period running from May 2000
through March 2003. The cases were consolidated into a single lawsuit. The
consolidated lawsuit generally seeks unspecified damages based on allegations
that the defendants violated United States securities laws and regulations by
making allegedly false and misleading statements about CMS Energy's business and
financial condition, particularly with respect to revenues and expenses recorded
in connection with round-trip trading by CMS MST. In January 2005, a motion was
granted, dismissing Consumers and three of the individual defendants, but the
court denied the motions to dismiss for CMS Energy and the 13 remaining
individual defendants. Plaintiffs filed a motion for class certification on
April 15, 2005 and an amended motion for class certification on June 20, 2005.
The hearing on this motion is scheduled for February 28, 2006. On September 20,
2005, CMS Energy filed a motion for judgment on the pleadings, based on the Dura
Pharmaceuticals decision issued by the United States Supreme Court. Plaintiffs
filed their response on October 25, 2005, along with a so-called "cross-motion
for partial summary judgment" seeking a determination that CMS Energy is liable
for all damages proximately caused by its "culpable conduct." On November 29,
2005, the judge issued a decision denying both CMS Energy's motion for judgment
on the pleadings and plaintiffs' cross-motion for partial summary judgment. CMS
Energy and the individual defendants will defend themselves vigorously in this
litigation but cannot predict its outcome.

                                        39
<PAGE>

ENVIRONMENTAL MATTERS

     CMS Energy and Consumers, as well as their subsidiaries and affiliates are
subject to various federal, state and local laws and regulations relating to the
environment. Several of these companies have been named parties to various
actions involving environmental issues. Based on their present knowledge and
subject to future legal and factual developments, they believe it is unlikely
that these actions, individually or in total, will have a material adverse
effect on their financial condition or future results of operations. For
additional information, see both CMS Energy's and Consumers' ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS and both CMS Energy's and Consumers' ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS.

          ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

CMS ENERGY

     During the fourth quarter of 2005, CMS Energy did not submit any matters to
a vote of security holders.

CONSUMERS

     During the fourth quarter of 2005, Consumers did not submit any matters to
a vote of security holders.

                                        40
<PAGE>

                                    PART II

        ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

CMS ENERGY

     Market prices for CMS Energy's Common Stock and related security holder
matters are contained in ITEM 7. CMS ENERGY'S MANAGEMENT'S DISCUSSION AND
ANALYSIS and ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- NOTE 17 OF
CMS ENERGY'S NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (QUARTERLY FINANCIAL AND
COMMON STOCK INFORMATION (UNAUDITED), which is incorporated by reference herein.
At February 22, 2006, the number of registered holders of CMS Energy Common
Stock totaled 54,670, based upon the number of record holders. In January 2003,
CMS Energy suspended the payment of dividends on its common stock. Information
regarding securities authorized for issuance under equity compensation plans is
included in our definitive proxy statement, which is incorporated by reference
herein.

CONSUMERS

     Consumers' common stock is privately held by its parent, CMS Energy, and
does not trade in the public market. In February, May, August and November 2005,
Consumers paid $118 million, $49 million, $40 million and $70 million in cash
dividends, respectively, on its common stock. In February, May, August and
November 2004, Consumers paid $77 million, $27 million, $82 million and $4
million in cash dividends, respectively, on its common stock.

                        ITEM 6. SELECTED FINANCIAL DATA

CMS ENERGY

     Selected financial information is contained in ITEM 8. FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA -- CMS ENERGY'S SELECTED FINANCIAL INFORMATION, which is
incorporated by reference herein.

CONSUMERS

     Selected financial information is contained in ITEM 8. FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA -- CONSUMERS' SELECTED FINANCIAL INFORMATION, which is
incorporated by reference herein.

                ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CMS ENERGY

     Management's discussion and analysis of financial condition and results of
operations is contained in ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA -- CMS ENERGY'S MANAGEMENT'S DISCUSSION AND ANALYSIS, which is incorporated
by reference herein.

CONSUMERS

     Management's discussion and analysis of financial condition and results of
operations is contained in ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA -- CONSUMERS' MANAGEMENT'S DISCUSSION AND ANALYSIS, which is incorporated
by reference herein.

                                        41
<PAGE>

      ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

CMS ENERGY

     Quantitative and Qualitative Disclosures About Market Risk is contained in
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- CMS ENERGY'S MANAGEMENT'S
DISCUSSION AND ANALYSIS -- CRITICAL ACCOUNTING POLICIES -- ACCOUNTING FOR
FINANCIAL AND DERIVATIVE INSTRUMENTS, TRADING ACTIVITIES, AND MARKET RISK
INFORMATION, which is incorporated by reference herein.

CONSUMERS

     Quantitative and Qualitative Disclosures About Market Risk is contained in
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- CONSUMERS' MANAGEMENT'S
DISCUSSION AND ANALYSIS -- CRITICAL ACCOUNTING POLICIES -- ACCOUNTING FOR
FINANCIAL AND DERIVATIVE INSTRUMENTS AND MARKET RISK INFORMATION, which is
incorporated by reference herein.

                                        42
<PAGE>

              ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Index to Financial Statements:

<Table>
<Caption>
                                                                 PAGE
                                                                 ----
<S>                                                             <C>
CMS ENERGY CORPORATION
Selected Financial Information..............................      CMS-2
Management's Discussion and Analysis
  Executive Overview........................................      CMS-3
  Forward-Looking Statements and Information................      CMS-4
  Results of Operations.....................................      CMS-6
  Critical Accounting Policies..............................     CMS-14
  Capital Resources and Liquidity...........................     CMS-23
  Outlook...................................................     CMS-27
  Implementation of New Accounting Standards................     CMS-36
Consolidated Financial Statements
  Consolidated Statements of Income (Loss)..................     CMS-38
  Consolidated Statements of Cash Flows.....................     CMS-40
  Consolidated Balance Sheets...............................     CMS-42
  Consolidated Statements of Common Stockholders' Equity....     CMS-44
Notes to Consolidated Financial Statements:
   1. Corporate Structure and Accounting Policies...........     CMS-47
   2. Asset Impairment Charges, Sales, and Discontinued
     Operations.............................................     CMS-52
   3. Contingencies.........................................     CMS-55
   4. Financings and Capitalization.........................     CMS-71
   5. Earnings Per Share....................................     CMS-77
   6. Financial and Derivative Instruments..................     CMS-78
   7. Retirement Benefits...................................     CMS-84
   8. Asset Retirement Obligations..........................     CMS-89
   9. Income Taxes..........................................     CMS-91
  10. Executive Incentive Compensation......................     CMS-94
  11. Leases................................................     CMS-96
  12. Property, Plant, and Equipment........................     CMS-98
  13. Equity Method Investments.............................     CMS-99
  14. Jointly Owned Regulated Utility Facilities............    CMS-102
  15. Reportable Segments...................................    CMS-102
  16. Consolidation of Variable Interest Entities...........    CMS-104
  17. Quarterly Financial and Common Stock Information
     (Unaudited)............................................    CMS-106
Reports of Independent Registered Public Accounting Firms...    CMS-107
</Table>

                                        43
<PAGE>

<Table>
<Caption>
                                                              PAGE
                                                              ----
<S>                                                           <C>
CONSUMERS ENERGY COMPANY
Selected Financial Information..............................   CE-2
Management's Discussion and Analysis
  Executive Overview........................................   CE-3
  Forward-Looking Statements and Information................   CE-4
  Results of Operations.....................................   CE-6
  Critical Accounting Policies..............................  CE-12
  Capital Resources and Liquidity...........................  CE-19
  Outlook...................................................  CE-23
  Implementation of New Accounting Standards................  CE-31
Consolidated Financial Statements
  Consolidated Statements of Income (Loss)..................  CE-33
  Consolidated Statements of Cash Flows.....................  CE-34
  Consolidated Balance Sheets...............................  CE-36
  Consolidated Statements of Common Stockholder's Equity....  CE-38
Notes to Consolidated Financial Statements:
   1. Corporate Structure and Accounting Policies...........  CE-41
   2. Asset Impairment Charges..............................  CE-45
   3. Contingencies.........................................  CE-46
   4. Financings and Capitalization.........................  CE-57
   5. Financial and Derivative Instruments..................  CE-60
   6. Retirement Benefits...................................  CE-65
   7. Asset Retirement Obligations..........................  CE-71
   8. Income Taxes..........................................  CE-73
   9. Executive Incentive Compensation......................  CE-75
  10. Leases................................................  CE-79
  11. Property, Plant, and Equipment........................  CE-80
  12. Jointly Owned Regulated Utility Facilities............  CE-82
  13. Reportable Segments...................................  CE-82
  14. Consolidation of Variable Interest Entities...........  CE-84
  15. Quarterly Financial and Common Stock Information
     (Unaudited)............................................  CE-84
Reports of Independent Registered Public Accounting Firms...  CE-86
</Table>

                                        44
<PAGE>

                               (CMS ENERGY LOGO)

                     2005 CONSOLIDATED FINANCIAL STATEMENTS

                                      CMS-1
<PAGE>

                             CMS ENERGY CORPORATION
                         SELECTED FINANCIAL INFORMATION

<Table>
<Caption>
                                                           2005      2004      2003      2002      2001
                                                           ----      ----      ----      ----      ----
<S>                                                  <C>  <C>       <C>       <C>       <C>       <C>
Operating revenue (in millions)....................  ($)    6,288     5,472     5,513     8,673     8,006
Earnings from equity method investees (in
  millions)........................................  ($)      125       115       164        92       172
Income (loss) from continuing operations (in
  millions)........................................  ($)      (98)      127       (42)     (394)     (327)
Cumulative effect of change in accounting (in
  millions)........................................  ($)       --        (2)      (24)       18        (4)
Net income (loss) (in millions)....................  ($)      (84)      121       (43)     (650)     (459)
Net income (loss) available to common stockholders
  (in millions)....................................  ($)      (94)      110       (44)     (650)     (459)
Average common shares outstanding (in thousands)...       211,819   168,553   150,434   139,047   130,758
Net income (loss) from continuing operations per
  average common share
    CMS Energy -- Basic............................  ($)    (0.51)     0.68     (0.30)    (2.84)    (2.50)
                 -- Diluted........................  ($)    (0.51)     0.67     (0.30)    (2.84)    (2.50)
Cumulative effect of change in accounting per
  average common share
    CMS Energy -- Basic............................  ($)       --     (0.01)    (0.16)     0.13     (0.03)
                 -- Diluted........................  ($)       --     (0.01)    (0.16)     0.13     (0.03)
Income (loss) per average common share
    CMS Energy -- Basic............................  ($)    (0.44)     0.65     (0.30)    (4.68)    (3.51)
                 -- Diluted........................  ($)    (0.44)     0.64     (0.30)    (4.68)    (3.51)
Cash provided by (used in) operations (in
  millions)........................................  ($)      646       398      (250)      614       372
Capital expenditures, excluding acquisitions,
  capital lease additions (in millions)............  ($)      593       525       535       747     1,239
Total assets (in millions)(a)......................  ($)   16,020    15,872    13,838    14,781    17,633
Long-term debt, excluding current portion (in
  millions)(a).....................................  ($)    6,800     6,444     6,020     5,357     5,842
Long-term debt-related parties, excluding current
  portion (in millions)(b).........................  ($)      178       504       684        --        --
Non-current portion of capital leases (in
  millions)........................................  ($)      308       315        58       116        71
Total preferred stock (in millions)................  ($)      305       305       305        44        44
Total Trust Preferred Securities (in
  millions)(b).....................................  ($)       --        --        --       883     1,214
Cash dividends declared per common share...........  ($)       --        --        --      1.09      1.46
Market price of common stock at year-end...........  ($)    14.51     10.45      8.52      9.44     24.03
Book value per common share at year-end............  ($)    10.53     10.62      9.84      7.48     14.98
Number of employees at year-end (full-time
  equivalents).....................................         8,713     8,660     8,411    10,477    11,510
ELECTRIC UTILITY STATISTICS
  Sales (billions of kWh)..........................            43        40        39        39        40
  Customers (in thousands).........................         1,789     1,772     1,754     1,734     1,712
  Average sales rate per kWh.......................  (c)     6.73      6.88      6.91      6.88      6.65
GAS UTILITY STATISTICS
  Sales and transportation deliveries (bcf)........           350       385       380       376       367
  Customers (in thousands)(c)......................         1,708     1,691     1,671     1,652     1,630
  Average sales rate per mcf.......................  ($)     9.61      8.04      6.72      5.67      5.34
</Table>

-------------------------
(a)  Under revised FASB Interpretation No. 46, we are the primary beneficiary of
     the MCV Partnership and the FMLP. As a result, we have consolidated their
     assets, liabilities and activities into our financial statements as of and
     for the years ended December 31, 2005 and 2004. These partnerships had
     third party obligations totaling $482 million at December 31, 2005 and $582
     million at December 31, 2004. Property, plant and equipment serving as
     collateral for these obligations had a carrying value of $224 million at
     December 31, 2005 and $1.426 billion at December 31, 2004.

(b)  Effective December 31, 2003, Trust Preferred Securities are classified on
     the balance sheet as Long-term debt -- related parties.

(c)  Excludes off-system transportation customers.

                                      CMS-2
<PAGE>

                             CMS Energy Corporation
                      Management's Discussion and Analysis

     This MD&A is a consolidated report of CMS Energy and Consumers. The terms
"we" and "our" as used in this report refer to CMS Energy and its subsidiaries
as a consolidated entity, except where it is clear that such term means only CMS
Energy.

EXECUTIVE OVERVIEW

     CMS Energy is an integrated energy company operating primarily in Michigan.
We are the parent holding company of Consumers and Enterprises. Consumers is a
combination electric and gas utility company serving Michigan's Lower Peninsula.
Enterprises, through various subsidiaries and equity investments, is engaged in
domestic and international diversified energy businesses including independent
power production, electric distribution, and natural gas transmission, storage,
and processing. We manage our businesses by the nature of services each provides
and operate principally in three business segments: electric utility, gas
utility, and enterprises.

     We earn our revenue and generate cash from operations by providing electric
and natural gas utility services, electric power generation, gas transmission,
storage, and processing. Our businesses are affected primarily by:

     - weather, especially during the traditional heating and cooling seasons,

     - economic conditions, primarily in Michigan,

     - regulation and regulatory issues that affect our gas and electric utility
       operations,

     - energy commodity prices,

     - interest rates, and

     - our debt credit rating.

     During the past two years, our business strategy has involved improving our
balance sheet and maintaining focus on our core strength: utility operations and
service. Our primary focus with respect to our non-utility businesses has been
to optimize cash flow and further reduce our business risk and leverage through
the sale of non-strategic assets, and to improve earnings and cash flow from the
businesses we retain. Although most of our asset sales program is complete, we
still may sell certain remaining businesses or assets as opportunities arise.

     In 2005, we continued our focus on utility operations and meeting customer
commitments. We also enhanced the financial returns of our Enterprises
businesses by taking full advantage of the American Jobs Creation Act. In 2005,
we repatriated $377 million from overseas to the U.S. under the provisions of
this law at a 5.25 percent federal income tax rate. Nearly all of those dollars
have been invested in Consumers.

     Further, 2005 was the third year of our five-year plan to reduce parent
debt. In 2005, we retired higher-interest rate consolidated debt and other
obligations through the use of proceeds from the issuance of $275 million of CMS
Energy senior notes and $875 million of Consumers' FMB. We also issued 23
million shares of common stock and invested $700 million in Consumers in 2005.
In January 2006, we invested an additional $100 million in Consumers and in
February 2006, Consumers extinguished, through a legal defeasance, $129 million
of 9 percent related party notes.

     Despite this progress, working capital and cash flow continue to be a
challenge for us. Natural gas prices continue to increase substantially.
Although our natural gas purchases are recoverable from our utility customers,
as gas prices increase, the amount we pay for natural gas will require
additional liquidity due to the lag in cost recoveries.

     In addition to causing working capital issues for us, rising natural gas
prices caused the MCV Partnership to reevaluate the economics of operating the
MCV Facility and to determine that an impairment charge of $1.159 billion was
required in September 2005. As a result, our 2005 net income was reduced by $369
million, after accounting for minority interest and tax effects. We further
reduced our 2005 net income by $16 million by

                                      CMS-3
<PAGE>

impairing certain other assets on our Consolidated Balance Sheets related to the
MCV Partnership. For additional details regarding the impairment, see Note 2,
Asset Impairment Charges, Sales, and Discontinued Operations.

     Projected future gas prices continue to threaten the continuing viability
of the MCV Facility. We are evaluating various alternatives in order to develop
a new long-term strategy with respect to the MCV Facility. The MCV Partnership
is working aggressively to reduce costs, improve operations, and enhance cash
flows. However, continued high gas prices could result in a further impairment
of our ownership interests in the MCV Partnership and the FMLP.

     Going forward, our strategy will continue to focus on:

     - managing cash flow issues caused by rising gas prices,

     - reducing parent company debt,

     - maintaining and growing earnings, and

     - positioning us to make investments that complement our strengths.

     As we execute our strategy, we will need to overcome a sluggish Michigan
economy that has been further hampered by recent negative developments in
Michigan's automotive industry and limited growth in the non-automotive and
health services sectors of our economy.

     These negative effects will be offset somewhat by the reduction we are
experiencing in ROA load in our service territory. At December 31, 2005,
alternative electric suppliers were providing 552 MW of generation service to
ROA customers. This amount represents a decrease of 40 percent compared to
December 31, 2004, and is 7 percent of our total distribution load. It is,
however, difficult to predict future ROA customer trends.

     Finally, successful execution of our strategy will require continuing
earnings and cash flow contributions from our Enterprises businesses.

FORWARD-LOOKING STATEMENTS AND INFORMATION

     This Form 10-K and other written and oral statements that we make contain
forward-looking statements as defined in Rule 3b-6 under the Securities Exchange
Act of 1934, as amended, Rule 175 under the Securities Act of 1933, as amended,
and relevant legal decisions. Our intention with the use of such words as "may,"
"could," "anticipates," "believes," "estimates," "expects," "intends," "plans,"
and other similar words is to identify forward-looking statements that involve
risk and uncertainty. We designed this discussion of potential risks and
uncertainties to highlight important factors that may impact our business and
financial outlook. We have no obligation to update or revise forward-looking
statements regardless of whether new information, future events, or any other
factors affect the information contained in the statements. These
forward-looking statements are subject to various factors that could cause our
actual results to differ materially from the results anticipated in these
statements. Such factors include our inability to predict and/or control:

     - capital and financial market conditions, including the price of CMS
       Energy Common Stock, and the effect of such market conditions on the
       Pension Plan, interest rates, and access to the capital markets,
       including availability of financing to CMS Energy, Consumers, or any of
       their affiliates, and the energy industry,

     - market perception of the energy industry, CMS Energy, Consumers, or any
       of their affiliates,

     - credit ratings of CMS Energy, Consumers, or any of their affiliates,

     - currency fluctuations, transfer restrictions, and exchange controls,

     - factors affecting utility and diversified energy operations such as
       unusual weather conditions, catastrophic weather-related damage,
       unscheduled generation outages, maintenance or repairs, environmental
       incidents, or electric transmission or gas pipeline system constraints,

     - international, national, regional, and local economic, competitive, and
       regulatory policies, conditions and developments,

                                      CMS-4
<PAGE>

     - adverse regulatory or legal decisions, including those related to
       environmental laws and regulations, and potential environmental
       remediation costs associated with such decisions, including but not
       limited to Bay Harbor,

     - potentially adverse regulatory treatment and/or regulatory lag concerning
       a number of significant questions presently before the MPSC including:

        - recovery of Clean Air Act costs and other environmental and
          safety-related expenditures,

        - power supply and natural gas supply costs when oil prices and other
          fuel prices are rapidly increasing,

        - timely recognition in rates of additional equity investments in
          Consumers,

        - adequate and timely recovery of additional electric and gas rate-based
          investments,

        - adequate and timely recovery of higher MISO energy costs, and

        - recovery of future Stranded Costs incurred due to customers choosing
          alternative energy suppliers,

     - the impact of adverse natural gas prices on the MCV Partnership and FMLP
       investments, regulatory decisions that limit recovery of capacity and
       fixed energy payments, and our ability to develop a new long-term
       strategy with respect to the MCV Facility,

     - federal regulation of electric sales and transmission of electricity,
       including periodic re-examination by federal regulators of the
       market-based sales authorizations in wholesale power markets without
       price restrictions,

     - energy markets, including availability of capacity and the timing and
       extent of changes in commodity prices for oil, coal, natural gas, natural
       gas liquids, electricity and certain related products due to lower or
       higher demand, shortages, transportation problems, or other developments,

     - our ability to collect accounts receivable from our gas customers due to
       high natural gas prices,

     - potential for the Midwest Energy Market to develop into an active energy
       market in the state of Michigan, which may lead us to account for certain
       electric energy contracts at CMS ERM as derivatives,

     - the GAAP requirement that we utilize mark-to-market accounting on certain
       energy commodity contracts and interest rate swaps, which may have, in
       any given period, a significant positive or negative effect on earnings,
       which could change dramatically or be eliminated in subsequent periods
       and could add to earnings volatility,

     - the effect on our electric utility of the direct and indirect impacts of
       the continued economic downturn experienced by our automotive and
       automotive parts manufacturing customers,

     - potential disruption, expropriation or interruption of facilities or
       operations due to accidents, war, terrorism, or changing political
       conditions and the ability to obtain or maintain insurance coverage for
       such events,

     - nuclear power plant performance, decommissioning, policies, procedures,
       incidents, and regulation, including the availability of spent nuclear
       fuel storage,

     - technological developments in energy production, delivery, and usage,

     - achievement of capital expenditure and operating expense goals,

     - changes in financial or regulatory accounting principles or policies,

     - changes in tax laws or new IRS interpretations of existing tax laws,

     - outcome, cost, and other effects of legal and administrative proceedings,
       settlements, investigations and claims, including particularly claims,
       damages, and fines resulting from round-trip trading and inaccurate

                                      CMS-5
<PAGE>

       commodity price reporting, including investigations by the DOJ regarding
       round-trip trading and price reporting,

     - limitations on our ability to control the development or operation of
       projects in which our subsidiaries have a minority interest,

     - disruptions in the normal commercial insurance and surety bond markets
       that may increase costs or reduce traditional insurance coverage,
       particularly terrorism and sabotage insurance and performance bonds,

     - the efficient sale of non-strategic or under-performing domestic or
       international assets and discontinuation of certain operations,

     - other business or investment considerations that may be disclosed from
       time to time in CMS Energy's or Consumers' SEC filings, or in other
       publicly issued written documents, and

     - other uncertainties that are difficult to predict, and many of which are
       beyond our control.

     For additional information regarding these and other uncertainties, see
Item 1A. Risk Factors, and Note 3, Contingencies.

RESULTS OF OPERATIONS

CMS ENERGY CONSOLIDATED RESULTS OF OPERATIONS

<Table>
<Caption>
YEARS ENDED DECEMBER 31                                          2005       2004      2003
-----------------------                                          ----       ----      ----
                                                                IN MILLIONS (EXCEPT FOR PER
                                                                       SHARE AMOUNTS)
<S>                                                             <C>        <C>       <C>
Net Income (Loss) Available to Common Stockholders..........    $  (94)    $ 110     $  (44)
Basic Earnings (Loss) Per Share.............................    $(0.44)    $0.65     $(0.30)
Diluted Earnings (Loss) Per Share...........................    $(0.44)    $0.64     $(0.30)
</Table>

<Table>
<Caption>
YEARS ENDED DECEMBER 31                             2005     2004     CHANGE    2004     2003     CHANGE
-----------------------                             ----     ----     ------    ----     ----     ------
                                                                        IN MILLIONS
<S>                                                 <C>      <C>      <C>       <C>      <C>      <C>
Electric Utility................................    $ 153    $ 223    $ (70)    $ 223    $ 167     $ 56
Gas Utility.....................................       48       71      (23)       71       38       33
Enterprises.....................................     (142)      19     (161)       19        8       11
Corporate Interest and Other....................     (167)    (197)      30      (197)    (256)      59
Discontinued Operations.........................       14       (4)      18        (4)      23      (27)
Accounting Changes..............................       --       (2)       2        (2)     (24)      22
                                                    -----    -----    -----     -----    -----     ----
Net Income (Loss) Available to Common
  Stockholders..................................    $ (94)   $ 110    $(204)    $ 110    $ (44)    $154
                                                    =====    =====    =====     =====    =====     ====
</Table>

     For 2005, our net loss available to common stockholders was $94 million
compared to net income available to common stockholders of $110 million for
2004. Our losses in 2005 reflect a substantial asset impairment charge taken at
the MCV Partnership and significant cost increases at our electric and gas
utilities. These negative factors were offset partially by improvements in our
non-regulated business earnings and substantial reductions in interest expense
and income tax expense.

     Specific changes to net income (loss) available to common stockholders for
2005 versus 2004 are:

<Table>
<Caption>
                                                                      IN MILLIONS
                                                                      -----------
<S>   <C>                                                             <C>
-     decrease in earnings from our ownership interest in the MCV
      Partnership due to a $385 million impairment charge to
      property, plant, and equipment offset partially by an
      increase of $100 million from operations, primarily due to
      an increase in fair value of certain long-term gas contracts
      and financial hedges,                                              $(285)
</Table>

                                      CMS-6
<PAGE>

<Table>
<Caption>
                                                                      IN MILLIONS
                                                                      -----------
<S>   <C>                                                             <C>
-     decrease in earnings at our electric utility primarily due
      to increased operating and maintenance expenses, an
      underrecovery of power supply costs, and a reduction in
      income from the regulatory return on capital expenditures,
      offset partially by a weather-driven increase in sales to
      our residential customers and a reduction in interest
      charges,                                                             (70)
-     lower gains on the sale of assets in 2005,                           (30)
-     decrease in earnings at our gas utility primarily due to
      increased operating and maintenance expenses, offset
      partially by a MPSC-authorized gas rate surcharge,                   (23)
-     increase in other corporate expenses primarily due to legal
      fees and the expiration of general business tax credits in
      2005,                                                                (16)
-     absence in 2005 of impairment charges recorded in 2004
      related to the sales of our investments in Loy Yang and GVK,         104
-     reduction in corporate interest expense due to lower debt
      levels and a reduction in average interest rates,                     29
-     increase in tax benefits from the American Jobs Creation Act
      of 2004,                                                              24
-     increase in income from discontinued operations due to
      favorable litigation results and the absence of other
      expenses recorded in 2004,                                            18
-     increase in corporate tax benefits,                                   17
-     increase in Shuweihat earnings,                                       10
-     increase in earnings from other Enterprises' subsidiaries,
      and                                                                   10
-     decrease in debt retirement charges.                                   8
                                                                         -----
Total Change                                                             $(204)
                                                                         =====
</Table>

     For 2004, our net income available to common stockholders was $110 million
compared to a net loss available to common stockholders of $44 million for 2003.
The improvement reflects the increased earnings from our utility due in large
part to rulings from the MPSC. The increase also reflects our continued
commitment to cost management, the continued reduction of debt at our parent
company, lower interest expense from refinanced debt, and benefits from the
American Jobs Creation Act. This improvement was offset partially by increased
impairment charges as we continued to dispose of certain businesses that are not
strategic to us. Net income was also reduced by an environmental remediation
charge related to our involvement in Bay Harbor.

     Specific changes to net income (loss) available to common stockholders for
2004 versus 2003 are:

<Table>
<Caption>
                                                                      IN MILLIONS
                                                                      -----------
<S>   <C>                                                             <C>
-     increase in earnings at our electric utility as favorable
      treatment of depreciation and interest under the Customer
      Choice Act and reduced pension and benefit costs more than
      offset the effects of milder weather, reduced tariff
      revenues equivalent to the Big Rock nuclear decommissioning
      surcharge, and customers choosing alternative electric
      suppliers,                                                         $ 56
-     reduction in corporate interest expense,                             56
-     gain from the 2004 sale of our Parmelia business and our
      interest in Goldfields,                                              35
-     absence in 2004 of a deferred tax asset valuation reserve
      established in 2003,                                                 34
-     increase in net income at our gas utility resulting from
      favorable impacts of MPSC rate orders, reduced pension and
      benefit costs outpacing increased interest costs, and the
      effects of milder weather,                                           33
-     reduction in charges related to changes in accounting,               22
-     income tax benefit recorded at Enterprises resulting from
      the American Jobs Creation Act of 2004,                              21
</Table>

                                      CMS-7
<PAGE>

<Table>
<Caption>
                                                                      IN MILLIONS
                                                                      -----------
<S>   <C>                                                             <C>
-     net reduction in operating and maintenance expenses at
      Enterprises resulting from a reduction in expenses at CMS
      ERM, which sold its non-essential business segments and
      moved its headquarters from Houston, Texas to Jackson,
      Michigan in 2003,                                                    20
-     net reduction in debt retirement charges,                             5
-     increase in net asset impairment charges,                           (36)
-     absence in 2004 of MSBT refunds received in 2003,                   (30)
-     net environmental remediation charge associated with our
      involvement in Bay Harbor,                                          (29)
-     absence in 2004 of gains in Discontinued Operations recorded
      in 2003, and                                                        (23)
-     increase in the declaration and payment of CMS Energy
      preferred dividends.                                                (10)
                                                                         ----
Total Change                                                             $154
                                                                         ====
</Table>

ELECTRIC UTILITY RESULTS OF OPERATIONS

<Table>
<Caption>
YEARS ENDED DECEMBER 31                                2005    2004    CHANGE    2004    2003    CHANGE
-----------------------                                ----    ----    ------    ----    ----    ------
                                                                         IN MILLIONS
<S>                                                    <C>     <C>     <C>       <C>     <C>     <C>
Net income.........................................    $153    $223    $ (70)    $223    $167     $ 56
                                                       ====    ====    =====     ====    ====     ====
REASONS FOR THE CHANGE:
Electric deliveries................................                    $  91                      $(34)
Power supply costs and related revenue.............                      (46)                      (31)
Other operating expenses, other income and
  non-commodity revenue............................                     (131)                       91
Regulatory return on capital expenditures and
  related capitalized interest.....................                      (30)                       77
General taxes......................................                        6                        (8)
Interest charges...................................                        5                        (9)
Income taxes.......................................                       35                       (30)
                                                                       -----                      ----
Total change.......................................                    $ (70)                     $ 56
                                                                       =====                      ====
</Table>

     ELECTRIC DELIVERIES: For 2005, electric deliveries to end-use customers
increased 1.3 billion kWh or 3.4 percent versus 2004. The corresponding increase
in electric delivery revenue was due to increased sales to residential
customers, reflecting warmer summer weather and increased surcharge revenue from
all customers.

     On July 1, 2004, Consumers started collecting a surcharge to recover costs
incurred in the transition to customer choice. This surcharge increased electric
delivery revenue by $13 million in 2005 versus 2004. Surcharge revenue related
to the recovery of security costs and stranded costs increased electric delivery
revenue by an additional $10 million in 2005 versus 2004.

     For 2004, electric deliveries to end-use customers increased 0.1 billion
kWh or 0.4 percent versus 2003. Despite the increase in electric deliveries,
electric delivery revenue decreased due to the milder summer temperatures'
negative impact on residential customer air conditioning usage, customers
choosing alternative electric suppliers, and tariff revenue reductions. The
tariff revenue reductions began on January 1, 2004, and were equivalent to the
Big Rock nuclear decommissioning surcharge in effect when our electric retail
rates were frozen from June 2000 through December 31, 2003. The tariff revenue
reductions decreased electric delivery revenue by $35 million.

     Surcharges related to the recovery of costs incurred in the transition to
customer choice offset partially the reductions to electric delivery revenue.
Recovery of these costs began on July 1, 2004 and increased electric delivery
revenue by $10 million in 2004 versus 2003.

     POWER SUPPLY COSTS AND RELATED REVENUE: Our recovery of power supply costs
was capped for our residential customers until January 1, 2006. For 2005, our
underrecovery of power costs allocated to these capped

                                      CMS-8
<PAGE>

customers increased by $76 million versus 2004. Power supply-related costs
increased in 2005 primarily due to higher coal costs and higher purchased power
costs due to higher weather-driven sales.

     Partially offsetting these underrecoveries were benefits from the deferral
of transmission and nitrogen oxide allowance expenditures related to our capped
customers. To the extent these costs were not fully recoverable due to the
application of rate caps, we deferred these costs for recovery under Public Act
141. In December 2005, the MPSC approved the recovery of these costs. For
additional details, see "Electric Utility Business Uncertainties -- Competition
and Regulatory Restructuring" within this MD&A. For 2005, deferrals of these
costs increased by $30 million versus 2004.

     For 2004, our recovery of power supply costs was capped for the residential
and small commercial customer classes. Operating income decreased $31 million in
2004 versus 2003 primarily due to power supply-related costs exceeding power
supply-related revenue charged to capped customers. Power supply-related costs
increased in 2004 primarily due to higher-priced purchased power necessary to
replace the generation loss from an extended refueling outage at our Palisades
nuclear generating plant and higher coal prices.

     OTHER OPERATING EXPENSES, OTHER INCOME AND NON-COMMODITY REVENUE: For 2005,
other operating expenses increased $139 million, other income increased $4
million, and non-commodity revenue increased $4 million versus 2004.

     The increase in other operating expenses reflects higher depreciation and
amortization expense, higher pension and benefit expense, and higher
underrecovery expense related to the MCV PPA, offset partially by our direct
savings from the RCP. Depreciation and amortization expense increased primarily
due to a reduction in 2004 expense to reflect an MPSC order allowing recovery of
$57 million of Stranded Costs. Pension and benefit expense increased primarily
due to changes in actuarial assumptions and the remeasurement of our pension and
OPEB plans to reflect the new collective bargaining agreement between the
Utility Workers Union of America and Consumers. Benefit expense also reflects
the reinstatement of the employer matching contribution to our 401(k) plan in
January 2005.

     In 1992, a liability was established for estimated future underrecoveries
of power supply costs under the MCV PPA. In 2004, a portion of the cash
underrecoveries continued to reduce this liability until its depletion in
December. In 2005, all cash underrecoveries were expensed directly to income.
Consequently, the cost associated with the MCV PPA cash underrecoveries
increased operating expense $30 million for 2005 versus 2004. Offsetting this
increased operating expense were the savings from the RCP approved by the MPSC
in January 2005.

     The RCP allows us to dispatch the MCV Facility on the basis of natural gas
prices, which will reduce the MCV Facility's annual production of electricity
and, as a result, reduce the MCV Facility's consumption of natural gas. The MCV
Facility's fuel cost savings are first used to offset the cost of replacement
power and fund a renewable energy program. Remaining savings are split between
us and the MCV Partnership. Our direct savings were shared 50 percent with
customers in 2005 and will be shared 70 percent thereafter. Our direct savings,
after allocating an equal portion to customers, was $32 million for 2005.

     For 2005, the increase in other income was primarily due to higher interest
income on short-term cash investments versus 2004, offset partially by expenses
associated with the early retirement of debt. The increase in non-commodity
revenue was primarily due to higher transmission services revenue versus 2004.

     For 2004, other operating expenses decreased $82 million, other income
increased $12 million, and non-commodity revenue decreased $3 million versus
2003. Other operating expenses decreased due to reduced depreciation, pension,
and benefit expenses. The decrease in depreciation expense reflects an MPSC
order allowing recovery of $57 million of Stranded Costs incurred from 2002 to
2003. The decrease in pension expense reflects fewer current-year retirees
choosing to receive a single lump sum distribution, and increased plan earnings
from higher average plan assets. The reduction in benefit expense is due to the
subsidy provided under Part D of the Medicare Prescription Drug, Improvement and
Modernization Act. Other income increased primarily due to $7 million of
interest income related to our 2002 and 2003 Stranded Cost recovery as
authorized by the MPSC.

                                      CMS-9
<PAGE>

     REGULATORY RETURN ON CAPITAL EXPENDITURES AND RELATED CAPITALIZED
INTEREST: For 2005, the return on capital expenditures in excess of our
depreciation base, net of related capitalized interest, decreased income by $30
million versus 2004. The decrease reflects the impact of the MPSC's December
2005 order authorizing recovery of and a return on our capital expenditures in
excess of our depreciation base.

     For 2004, the return on capital expenditures in excess of our depreciation
base, net of related capitalized interest, increased income by $77 million
versus 2003. The increase reflects a $72 million return on Clean Air Act costs
incurred during the period June 2000 through December 2003 to reflect an
interpretation of the Customer Choice Act by the MPSC in a rate order involving
Detroit Edison.

     GENERAL TAXES: For 2005, general taxes decreased primarily due to lower
property tax expense. Lower property tax expense in 2005 reflects the use of
revised tax tables by several of Consumers' taxing authorities and, separately,
other property tax refunds.

     For 2004, general taxes increased primarily due to increases in property
tax expense and the absence of a MSBT credit received in 2003. The 2003 MSBT
credit was associated with the construction of our corporate headquarters on a
qualifying Brownfield site.

     INTEREST CHARGES: For 2005, interest charges reflect a 31 basis point
reduction in the average rate of interest on our debt. This benefit was offset
partially by higher average debt levels versus 2004.

     For 2004, interest charges reflect higher average debt levels, offset
partially by a 46 basis point reduction in the average rate of interest on our
debt versus 2003.

     INCOME TAXES: For 2005, income taxes decreased primarily due to lower
earnings versus 2004, offset partially by a $2 million increase to reflect the
tax treatment of items related to property, plant, and equipment as required by
past MPSC orders.

     For 2004, income taxes increased primarily due to increased earnings from
the electric utility versus 2003. The increase also reflects $2 million related
to the tax treatment of items related to property, plant, and equipment as
required by past MPSC orders. This increase was offset partially by the benefits
received from Part D of the Medicare Prescription Drug, Improvement and
Modernization Act, which was signed into law in December 2003.

GAS UTILITY RESULTS OF OPERATIONS

<Table>
<Caption>
YEARS ENDED DECEMBER 31                                   2005    2004    CHANGE    2004    2003    CHANGE
-----------------------                                   ----    ----    ------    ----    ----    ------
                                                                            IN MILLIONS
<S>                                                       <C>     <C>     <C>       <C>     <C>     <C>
Net income............................................    $48     $71      $(23)    $71     $38      $ 33
                                                          ===     ===      ====     ===     ===      ====
Reasons for the change:
Gas deliveries........................................                     $ (6)                     $ (7)
Gas rate increase.....................................                       28                        28
Gas wholesale and retail services, other gas revenue
  and other income....................................                        9                         8
Operation and maintenance.............................                      (49)                       11
General taxes.........................................                        1                        (4)
Depreciation..........................................                       (5)                       16
Interest charges......................................                       (2)                      (14)
Income taxes..........................................                        1                        (5)
                                                                           ----                      ----
Total change..........................................                     $(23)                     $ 33
                                                                           ====                      ====
</Table>

     GAS DELIVERIES: For 2005, gas delivery revenues reflect lower deliveries to
our customers versus 2004. Gas deliveries, including miscellaneous
transportation to end-use customers, decreased 2.4 bcf or 0.7 percent.

     For 2004, gas deliveries, including transportation to end-use customers,
decreased 15.5 bcf or 4.6 percent due to milder weather versus 2003. Most
significantly, temperatures in the first quarter of the year were 12.1 percent
warmer than in the same period in 2003. The decrease in gas delivery revenues
was offset partially

                                      CMS-10
<PAGE>

by a $12 million increase in gas revenues associated with our annual analysis of
gas losses related to the gas transmission and distribution system.

     GAS RATE INCREASE: In December 2003, the MPSC issued an interim gas rate
order authorizing a $19 million annual increase to gas tariff rates. In October
2004, the MPSC issued a final order authorizing an annual increase of $58
million through a two-year surcharge. As a result of these orders, gas revenues
increased $28 million for 2005 versus 2004 and $28 million for 2004 versus 2003.

     GAS WHOLESALE AND RETAIL SERVICES, OTHER GAS REVENUE AND OTHER INCOME: For
2005, income from gas wholesale and retail services and other gas revenue
increased versus 2004. Other income increased primarily due to higher interest
income on short-term cash investments, offset partially by expenses associated
with the early retirement of debt, versus 2004.

     For 2004, gas wholesale and retail services and other gas revenue increased
primarily due to the absence of certain 2003 reductions to revenue. In 2003, gas
revenue was reduced primarily due to an $11 million 2002-2003 GCR disallowance.
Other income remained consistent with 2003.

     OPERATION AND MAINTENANCE: For 2005, operation and maintenance expenses
increased primarily due to increases in benefit costs and additional safety,
reliability, and customer service expenses versus 2004. Pension and benefit
expense increased primarily due to changes in actuarial assumptions and the
remeasurement of our pension and OPEB plans to reflect the new collective
bargaining agreement between the Utility Workers Union of America and Consumers.
Benefit expense also reflects the reinstatement of the employer matching
contribution to our 401(k) plan in January 2005.

     For 2004, operation and maintenance expenses decreased primarily due to
reduced pension and benefit expense of $23 million versus 2003. The decrease in
pension expense reflects fewer current year retirees choosing to receive a
single lump sum distribution, and increased plan earnings from higher average
plan assets. The reduction in benefit expense is due to the subsidy provided
under Part D of the Medicare Prescription Drug, Improvement and Modernization
Act. These reductions were offset partially by increased expenditures on safety,
reliability, and customer service.

     GENERAL TAXES: For 2005, general taxes decreased primarily due to lower
property tax expense versus 2004. Lower property tax expense in 2005 reflects an
increased use of revised tax tables by several of Consumers' taxing authorities,
and separately, other property tax refunds. For 2004, general taxes increased
due to the absence of an MSBT credit received in 2003. The 2003 MSBT credit
received from the state of Michigan was associated with the construction of our
corporate headquarters on a qualifying Brownfield site.

     DEPRECIATION: For 2005, depreciation expense increased primarily due to
higher plant in service versus 2004. For 2004 versus 2003, depreciation expense
decreased primarily due to reduced rates authorized by the MPSC's December 2003
interim rate order and the MPSC's October 2004 order, as modified by its
December 2004 order granting rehearing.

     INTEREST CHARGES: For 2005, interest charges reflect a 31 basis point
reduction in the average rate of interest on our debt and higher average debt
levels versus 2004.

     For 2004, interest charges reflect higher average debt levels, offset
partially by a 46 basis point reduction in the average rate of interest on our
debt versus 2003.

     INCOME TAXES: For 2005, income taxes decreased due to lower earnings versus
2004. This decrease was offset by $5 million to reflect the tax treatment of
items related to property, plant, and equipment as required by past MPSC orders,
and the write-off of general business credits expected to expire in 2005.

     For 2004, income taxes increased due to increased earnings versus 2003.
This increase was offset by $7 million to reflect the tax treatment of items
related to property, plant, and equipment as required by past MPSC orders, and
by Part D of the Medicare Prescription Drug, Improvement and Modernization Act,
which was signed into law in December 2003.

                                      CMS-11
<PAGE>

ENTERPRISES RESULTS OF OPERATIONS

<Table>
<Caption>
YEARS ENDED DECEMBER 31                                 2005     2004    CHANGE     2004    2003    CHANGE
-----------------------                                 ----     ----    ------     ----    ----    ------
                                                                           IN MILLIONS
<S>                                                     <C>      <C>     <C>        <C>     <C>     <C>
Net income (loss)...................................    $(142)   $19     $  (161)   $19      $8     $  11
                                                        =====    ===     =======    ===      ==     =====
Reasons for the change:
Operating revenues..................................                     $   244                    $(334)
Cost of gas and purchased power.....................                        (192)                     375
Fuel costs mark-to-market at MCV....................                         219                       --
Earnings from equity method investees...............                          11                       (8)
Gain on sale of assets..............................                         (42)                      53
Operation and maintenance...........................                         (25)                      31
General taxes, depreciation, and other income,
  net...............................................                          36                      (14)
Asset impairment charges............................                      (1,015)                     (75)
Environmental remediation...........................                           5                      (45)
Fixed charges.......................................                          13                       16
Minority interest...................................                         455                       (8)
Results of FASB Interpretation No. 46 Entities......                          --                      (40)
Income taxes........................................                         130                       60
                                                                         -------                    -----
Total change........................................                     $  (161)                   $  11
                                                                         =======                    =====
</Table>

     OPERATING REVENUES AND COST OF GAS AND PURCHASED POWER: For 2005, these
increases compared to 2004 were primarily due to the impact of increased
customer demand on deliveries, fuel costs, and purchased power at South American
subsidiaries and increased wholesale power sales and related costs at our
Michigan generating plants. Also contributing to the increase in operating
revenue were increased third-party gas sales and mark-to-market gains on gas
contracts at CMS ERM.

     For 2004, these decreases compared to 2003 were primarily due to the sale
of wholesale gas and power contracts at CMS ERM offset partially by higher
margins from South American subsidiaries.

     FUEL COSTS MARK-TO-MARKET AT MCV: For 2005, the fuel costs mark-to-market
adjustments of certain long-term gas contracts and financial hedges at the MCV
Partnership increased operating earnings due to increased gas prices compared to
reductions in 2004.

     EARNINGS FROM EQUITY METHOD INVESTEES: For 2005, the increase in equity
earnings compared to 2004 was primarily due to $10 million in earnings from
Shuweihat, which achieved commercial operations in the third quarter of 2004,
and a $5 million increase in earnings from GasAtacama, as it was able to import
more natural gas from Argentina than in 2004. Also contributing to the increase
were higher earnings at Neyveli of $6 million, primarily due to the settlement
of a revenue dispute, and $4 million of other net increases in earnings. These
increases were offset partially by the absence, in 2005, of $8 million in
earnings from Goldfields, which we sold in August 2004 and lower earnings at
Jorf Lasfar, primarily due to increases in coal related costs.

     For 2004, the decrease in equity earnings compared to 2003 was primarily
due to a $6 million reduction of earnings from Goldfields, which we sold in
August 2004, and losses on the settlement of derivative contracts. These
decreases were offset partially by $9 million in earnings from Shuweihat, which
began limited operations during the fourth quarter of 2004.

     GAIN ON SALE OF ASSETS: For 2005, gains on asset sales decreased compared
to 2004. In 2005, we had gains on the sale of GVK and SLAP. In 2004, we had
gains on the sale of Goldfields, the Bluewater Pipeline and land in Moapa,
Nevada.

     For 2004, gains on asset sales increased compared to 2003. In 2004, we had
gains on the sale of Goldfields, the Bluewater Pipeline and land in Moapa,
Nevada. In 2003, we had net losses on sales at CMS ERM, primarily due to the
sale of their wholesale gas contracts, and a loss on the sale of Guardian
pipeline, offset partially by a gain on the sale of land in Arcadia, Michigan.

                                      CMS-12
<PAGE>

     OPERATION AND MAINTENANCE: For 2005, the increase in operation and
maintenance expenses compared to 2004 was primarily due to a loss on the
termination of a prepaid gas contract, higher legal fees and the absence of an
insurance settlement received in 2004. Also contributing to the increase were
higher maintenance costs related to scheduled outages, new development costs and
increased costs at South American subsidiaries related to higher electrical
production.

     For 2004, operation and maintenance expenses decreased compared to 2003
primarily as the result of a reduction in expenses at CMS ERM, which sold its
non-essential business segments and moved its headquarters from Houston, Texas
to Jackson, Michigan.

     GENERAL TAXES, DEPRECIATION, AND OTHER INCOME, NET: For 2005, the net of
general tax expense, depreciation, and other income increased operating income
compared to 2004 primarily due to increased interest income, lower depreciation
expense at the MCV Partnership due to impairment of property, plant, and
equipment, lower accretion expense related to prepaid gas contracts, and the
removal of a contingent liability related to Leonard Field.

     For 2004, the net of general tax expense, depreciation, and other income
decreased operating income compared to 2003 due to foreign exchange losses
offset partially by lower depreciation due to the sale of non-essential assets
at CMS ERM in 2003.

     ASSET IMPAIRMENT CHARGES: For 2005, the increase in asset impairment
charges is primarily due to the $1.159 billion impairment of property, plant,
and equipment at the MCV Partnership, compared to the 2004 reduction in the fair
value of Loy Yang and impairments related to the sale of our interests in GVK
and SLAP.

     For 2004, the increase in asset impairment charges is due to the reduction
in the fair value of Loy Yang and impairments related to the sale of our
interests in GVK and SLAP, compared to the 2003 impairments of our investment in
CMS Electric and Gas' Venezuelan distribution utility and equity investments at
CMS Generation.

     ENVIRONMENTAL REMEDIATION: For 2005, we recorded an additional estimated
environmental remediation cost of $40 million related to our involvement in Bay
Harbor. In 2004, we recorded our initial estimate of $45 million.

     FIXED CHARGES: For 2005, fixed charges decreased compared to 2004 primarily
due to lower expense at the MCV Partnership as a result of lower debt levels due
to principal payments.

     For 2004, fixed charges decreased compared to 2003, due to lower average
debt levels and lower average interest rates primarily resulting from the payoff
of a short-term revolving credit line held by Enterprises during 2003. These
decreases were offset partially by the payment of preferred dividends to the
investor in our Michigan gas assets in 2004 and higher letter of credit fees.

     MINORITY INTEREST: For 2005, net losses attributed to minority interest
owners in our subsidiaries replaced net gains in 2004. The losses relate to the
asset impairment charge to property, plant, and equipment at the MCV
Partnership, offset partially by mark-to-market gains at the MCV Partnership.

     For 2004, net gains attributed to minority interest owners in our
subsidiaries were greater than the net gains in 2003, primarily due to net gains
at CMS Electric and Gas replacing net losses in 2003. The 2003 net losses at CMS
Electric and Gas relate to the impairment of our investment in CMS Electric and
Gas' Venezuelan distribution utility.

     RESULTS OF FASB INTERPRETATION NO. 46: We determined that we are the
primary beneficiary of the MCV Partnership and the FMLP as defined by FASB
Interpretation No. 46. As the primary beneficiary of these entities, we are
required to include them as consolidated subsidiaries in the results of
operations beginning in 2004. Prior to 2004, our portion of the net earnings or
losses from the MCV Partnership and the FMLP was included in the results of
operations as Earnings from equity method investees. For comparability purposes,
only the change in net earnings for these entities is presented for 2004 versus
2003.

     For 2004, earnings from the MCV Partnership and the FMLP decreased compared
to 2003 primarily due to mark-to-market losses related to gas contracts and
increased fuel and dispatch costs, primarily at the MCV Partnership. These
decreases were offset partially by dispatch and variable energy rate variance
revenue.

                                      CMS-13
<PAGE>

     INCOME TAXES: For 2005, the decrease in income tax expense compared to 2004
reflects lower earnings in 2005 due primarily to the impairment of property,
plant, and equipment at the MCV Partnership and income tax benefits related to
the American Jobs Creation Act of 2004.

     For 2004, the decrease in income taxes compared to 2003 is primarily due to
the foreign earnings repatriation tax benefit arising from the American Jobs
Creation Act of 2004 and a decrease in tax reserves.

CORPORATE INTEREST AND OTHER NET EXPENSES

<Table>
<Caption>
YEARS ENDED DECEMBER 31                  2005        2004        CHANGE       2004        2003        CHANGE
-----------------------                  ----        ----        ------       ----        ----        ------
                                                                     IN MILLIONS
<S>                                      <C>         <C>         <C>          <C>         <C>         <C>
Net loss..........................       $(167)      $(197)       $30         $(197)      $(256)       $59
                                         =====       =====        ===         =====       =====        ===
</Table>

     For 2005, corporate interest and other net expenses were $167 million, a
decrease of $30 million compared to the same period in 2004. The decrease
reflects lower interest expense due to lower average debt levels and a reduction
in the average rate of interest. Also contributing to the reduction in expenses
were lower debt retirement charges and an increase in corporate income tax
benefits. The decrease was offset partially by increased legal fees.

     For 2004, corporate interest and other net expenses were $197 million, a
decrease of $59 million compared to the same period in 2003. The decrease
reflects lower interest expense due to lower average debt levels and a reduction
in the average rate of interest. Also contributing to the decrease was a
reduction in debt retirement charges, and the absence in 2004 of a deferred tax
asset valuation reserve established in 2003. The decrease was offset partially
by an increase in the declaration and payment of CMS Energy preferred dividends
and an increase in general taxes primarily due to the absence of MSBT refunds
received in 2003.

     DISCONTINUED OPERATIONS: For 2005, our net income from Discontinued
Operations was $14 million, an increase of $18 million compared to the same
period in 2004. Income from 2005 primarily reflects an arbitration award related
to the 2003 sale of Marysville and a reduction in contingent liabilities due to
favorable results from litigation involving previously sold businesses. The net
loss for 2004 was primarily due to income tax adjustments, offset partially by
gains on asset sales. Income from 2003 primarily reflects the reclassification
of our international energy distribution business from discontinued operations
to continuing operations. The reclassification resulted in a reversal of a
previously recognized impairment loss. This increase was offset partially by an
impairment of Parmelia, interest allocated to discontinued operations, and a
loss on the disposal of CMS Viron.

     For additional details, see Note 2, Asset Impairment Charges, Sales, and
Discontinued Operations.

     ACCOUNTING CHANGES: In 2004, we recorded a $2 million loss for the
cumulative effect of a change in accounting principle. The loss was the result
of a change in the measurement date on our benefit plans. For additional
details, see Note 7, Retirement Benefits.

     In the first quarter of 2003, a $24 million loss for the cumulative effect
of changes in accounting principle was recognized, of which $23 million was
related to energy trading contracts and $1 million was related to asset
retirement obligations.

CRITICAL ACCOUNTING POLICIES

     The following accounting policies are important to an understanding of our
results of operations and financial condition and should be considered an
integral part of our MD&A:

     - use of estimates and assumptions in accounting for contingencies and
       long-lived assets and equity method investments,

     - accounting for the effects of industry regulation,

     - accounting for financial and derivative instruments, trading activities,
       and market risk information,

                                      CMS-14
<PAGE>

     - accounting for pension and OPEB,

     - accounting for asset retirement obligations, and

     - accounting for nuclear decommissioning costs.

     For additional accounting policies, see Note 1, Corporate Structure and
Accounting Policies.

USE OF ESTIMATES AND ASSUMPTIONS

     In preparing our financial statements, we use estimates and assumptions
that may affect reported amounts and disclosures. We use accounting estimates
for asset valuations, depreciation, amortization, financial and derivative
instruments, employee benefits, and contingencies. For example, we estimate the
rate of return on plan assets and the cost of future health-care benefits to
determine our annual pension and other postretirement benefit costs. There are
risks and uncertainties that may cause actual results to differ from estimated
results, such as changes in the regulatory environment, competition, foreign
exchange, regulatory decisions, and lawsuits.

     CONTINGENCIES: We are involved in various regulatory and legal proceedings
that arise in the ordinary course of our business. We record a liability for
contingencies based upon our assessment that a loss is probable and the amount
of loss can be reasonably estimated. The recording of estimated liabilities for
contingencies is guided by the principles in SFAS No. 5. We consider many
factors in making these assessments, including history and the specifics of each
matter. Significant contingencies include our pending class actions arising out
of round-trip trading and gas price reporting, our electric and gas
environmental estimates, and our indemnity and environmental remediation
obligations at Bay Harbor.

     The amount of income taxes we pay is subject to ongoing audits by federal,
state, and foreign tax authorities, which can result in proposed assessments.
Our estimate for the potential outcome for any uncertain tax issue is highly
judgmental. We believe we have adequately provided for any likely outcome
related to these matters. However, our future results may include favorable or
unfavorable adjustments to our estimated tax liabilities in the period the
assessments are made or resolved or when statutes of limitation on potential
assessments expire. As a result, our effective tax rate may fluctuate
significantly on a quarterly basis.

     LONG-LIVED ASSETS AND EQUITY METHOD INVESTMENTS: Our assessment of the
recoverability of long-lived assets and equity method investments involves
critical accounting estimates. We periodically perform tests of impairment if
certain conditions that are other than temporary exist that may indicate the
carrying value may not be recoverable. Of our total assets, recorded at $16.020
billion at December 31, 2005, 53 percent represent long-lived assets and equity
method investments that are subject to this type of analysis. We base our
evaluations of impairment on such indicators as:

     - the nature of the assets,

     - projected future economic benefits,

     - domestic and foreign regulatory and political environments,

     - state and federal regulatory and political environments,

     - historical and future cash flow and profitability measurements, and

     - other external market conditions or factors.

     If an event occurs or circumstances change in a manner that indicates the
recoverability of a long-lived asset should be assessed, we evaluate the asset
for impairment. An asset held in use is evaluated for impairment by calculating
the undiscounted future cash flows expected to result from the use of the asset
and its eventual disposition. If the undiscounted future cash flows are less
than the carrying amount, we recognize an impairment loss. The impairment loss
recognized is the amount by which the carrying amount exceeds the fair value. We
estimate the fair market value of the asset utilizing the best information
available. This information includes quoted market prices, market prices of
similar assets, and discounted future cash flow analyses. An asset considered
held for sale is recorded at the lower of its carrying amount or fair value,
less cost to sell.

                                      CMS-15
<PAGE>

     We also assess our ability to recover the carrying amounts of our equity
method investments. This assessment requires us to determine the fair values of
our equity method investments. The determination of fair value is based on
valuation methodologies, including discounted cash flows and the ability of the
investee to sustain an earnings capacity that justifies the carrying amount of
the investment. If the fair value is less than the carrying value and the
decline in value is considered to be other than temporary, an appropriate
write-down is recorded.

     Our assessments of fair value using these valuation methodologies represent
our best estimates at the time of the reviews and are consistent with our
internal planning. The estimates we use can change over time, which could have a
material impact on our financial statements.

     For additional details on asset impairments, see Note 2, Asset Impairment
Charges, Sales, and Discontinued Operations.

ACCOUNTING FOR THE EFFECTS OF INDUSTRY REGULATION

     Because we are involved in a regulated industry, regulatory decisions
affect the timing and recognition of revenues and expenses. We use SFAS No. 71
to account for the effects of these regulatory decisions. As a result, we may
defer or recognize revenues and expenses differently than a non-regulated
entity.

     For example, we may record as regulatory assets items that a non-regulated
entity normally would expense if the actions of the regulator indicate such
expenses will be recovered in future rates. Conversely, we may record as
regulatory liabilities items that non-regulated entities may normally recognize
as revenues if the actions of the regulator indicate they will require that such
revenues be refunded to customers. Judgment is required to determine the
recoverability of items recorded as regulatory assets and liabilities. At
December 31, 2005, we had $1.800 billion recorded as regulatory assets and
$1.753 billion recorded as regulatory liabilities.

ACCOUNTING FOR FINANCIAL AND DERIVATIVE INSTRUMENTS, TRADING ACTIVITIES, AND
MARKET RISK INFORMATION

     FINANCIAL INSTRUMENTS: We account for investments in debt and equity
securities using SFAS No. 115. Debt and equity securities classified as
available-for-sale are reported at fair value determined from quoted market
prices. Debt and equity securities classified as held-to-maturity are reported
at cost.

     Unrealized gains or losses resulting from changes in fair value of certain
available-for-sale debt and equity securities are reported, net of tax, in
equity as part of accumulated other comprehensive income. Unrealized gains or
losses are excluded from earnings unless the related changes in fair value are
determined to be other than temporary. Unrealized gains or losses on our nuclear
decommissioning investments are reflected as regulatory liabilities on our
Consolidated Balance Sheets. Realized gains or losses would not affect our
earnings or cash flows.

     DERIVATIVE INSTRUMENTS: We use the criteria in SFAS No. 133 to determine if
certain contracts must be accounted for as derivative instruments. These
criteria are complex and significant judgment is often required in applying the
criteria to specific contracts. If a contract is a derivative, it is recorded on
the balance sheet at its fair value. We then adjust the resulting asset or
liability each quarter to reflect any change in the market value of the
contract, a practice known as marking the contract to market. For additional
details on accounting for derivatives, see Note 6, Financial and Derivative
Instruments.

     To determine the fair value of our derivatives, we use information from
external sources (i.e., quoted market prices and third-party valuations), if
available. For certain contracts, this information is not available and we must
use mathematical valuation models to value our derivatives. These models require
various inputs and assumptions, including commodity market prices and
volatilities, as well as interest rates and contract maturity dates. Changes in
forward prices or volatilities could significantly change the calculated fair
value of our derivative contracts. The cash returns we actually realize on these
contracts may vary, either positively or negatively, from the results that we
estimate using these models. As part of valuing our derivatives at market, we
maintain reserves, if necessary, for credit risks arising from the financial
condition of counterparties.

                                      CMS-16
<PAGE>

     The following table summarizes the interest rate and volatility rate
assumptions we used to value these contracts at December 31, 2005:

<Table>
<Caption>
                                                              INTEREST RATES (%)   VOLATILITY RATES (%)
                                                              ------------------   --------------------
<S>                                                           <C>                  <C>
Long-term gas contracts associated with the MCV
  Partnership...............................................     4.39 - 4.92             33 - 73
Gas-related option contracts................................         4.10                43 - 73
Electricity-related option contracts........................         4.10                58 - 174
</Table>

     The types of contracts we typically classify as derivative instruments are
interest rate swaps, gas supply options, certain long-term gas contracts, gas
fuel futures and swaps, certain gas and electric forward contracts, electric and
gas options, electric swaps, and foreign currency exchange contracts. The
majority of our commodity purchase and sale contracts are not subject to
derivative accounting under SFAS No. 133 because:

     - they do not have a notional amount (that is, a number of units specified
       in a derivative instrument, such as MW of electricity or bcf of natural
       gas),

     - they qualify for the normal purchases and sales exception, or

     - there is not an active market for the commodity.

     Our coal purchase contracts are not derivatives because there is not an
active market for the coal we purchase. Similarly, certain of our electric
capacity and energy contracts are not derivatives due to the lack of an active
energy market in Michigan. If active markets for these commodities develop in
the future, some of these contracts may qualify as derivatives. For our coal
purchase contracts, the resulting mark-to-market impact on earnings could be
material. For our electric capacity and energy contracts, we believe that we
would be able to apply the normal purchases and sales exception to the majority
of these contracts (including the MCV PPA) and, therefore, would not be required
to mark these contracts to market.

     Establishment of the Midwest Energy Market: The MISO began operating the
Midwest Energy Market on April 1, 2005. By operating the Midwest Energy Market,
the MISO centrally dispatches electricity and transmission service throughout
much of the Midwest and provides day-ahead and real-time energy market
information. At this time, we believe that the establishment of this market does
not represent the development of an active energy market in Michigan, as defined
by SFAS No. 133. However, as the Midwest Energy Market matures, we will continue
to monitor its activity level and evaluate if an active energy market may exist
in Michigan.

     Implementation of the RCP: As a result of implementing the RCP in January
2005, a significant portion of the MCV Partnership's long-term gas contracts no
longer qualify as normal purchases because the gas will not be used to generate
electricity or steam. Accordingly, these contracts are accounted for as
derivatives, with changes in fair value recorded in earnings each quarter.
Additionally, certain of the MCV Partnership's natural gas futures and swap
contracts, which are used to hedge variable-priced long-term gas contracts, no
longer qualify for cash flow hedge accounting and we record any changes in their
fair value in earnings each quarter. As a result of recording the changes in
fair value of these long-term gas contracts and the related futures and swaps to
earnings, the MCV Partnership has recognized the following gains and losses in
2005:

<Table>
<Caption>
                                                                               2005
                                                         -------------------------------------------------
                                                          FIRST     SECOND      THIRD     FOURTH
                                                         QUARTER    QUARTER    QUARTER    QUARTER    TOTAL
                                                         -------    -------    -------    -------    -----
                                                                            IN MILLIONS
<S>                                                      <C>        <C>        <C>        <C>        <C>
Long-term gas contracts..............................     $146       $(21)      $117       $ (93)    $149
Related futures and swaps............................       63        (18)        80         (74)      51
                                                          ----       ----       ----       -----     ----
Total................................................     $209       $(39)      $197       $(167)    $200
                                                          ====       ====       ====       =====     ====
</Table>

     These gains and losses, shown before consideration of tax effects and
minority interest, are included in the total Fuel costs mark-to-market at MCV on
our Consolidated Statements of Income (Loss). Because of the volatility of the
natural gas market, the MCV Partnership expects future earnings volatility on
both the long-term

                                      CMS-17
<PAGE>

gas contracts and the futures and swap contracts, since gains and losses will be
recorded each quarter. As a result of mark-to-market gains, we have recorded
derivative assets totaling $256 million associated with the fair value of these
contracts on our Consolidated Balance Sheets. We expect almost all of these
assets to reverse through earnings during 2006 and 2007 as the gas is purchased
and the futures and swaps settle, with the remainder reversing between 2008 and
2011. Due to the impairment of the MCV Facility, the equity held by the minority
interest owners of the MCV Partnership has decreased significantly. Since we
have the controlling financial interest in the MCV Partnership, we will assume
100 percent of future losses recognized from the reversal of these assets, not
just our proportionate share.

     CMS ERM CONTRACTS: CMS ERM enters into and owns energy contracts as a part
of activities considered to be an integral part of CMS Energy's ongoing
operations. CMS ERM holds certain contracts for the future purchase and sale of
electricity and natural gas that will result in physical delivery of the
commodity at contractual prices. These forward contracts are generally long-term
in nature and are classified as non-trading. CMS ERM also uses various financial
instruments, including swaps, options, and futures, to manage commodity price
risks associated with its forward purchase and sale contracts and with
generation assets owned by CMS Energy or its subsidiaries. These financial
contracts are classified as trading activities.

     In accordance with SFAS No. 133, non-trading and trading contracts that
qualify as derivatives are recorded at fair value on our Consolidated Balance
Sheets. The resulting assets and liabilities are marked to market each quarter,
and the changes in fair value are recorded in earnings. For trading contracts,
these gains and losses are recorded net in accordance with EITF Issue No. 02-03.
Contracts that do not meet the definition of a derivative are accounted for as
executory contracts (that is, on an accrual basis).

     We include the fair value of the derivative contracts held by CMS ERM in
either Price risk management assets or Price risk management liabilities on our
Consolidated Balance Sheets. The following tables provide a summary of these
contracts at December 31, 2005:

<Table>
<Caption>
                                                                 NON-
                                                                TRADING    TRADING    TOTAL
                                                                -------    -------    -----
                                                                        IN MILLIONS
<S>                                                             <C>        <C>        <C>
Fair value of contracts outstanding at December 31, 2004....     $(199)     $ 201     $  2
Fair value of new contracts when entered into during the
  period(a).................................................        --         (3)      (3)
Contracts realized or otherwise settled during the period...       378       (396)     (18)
Other changes in fair value(b)..............................      (242)       298       56
                                                                 -----      -----     ----
Fair value of contracts outstanding at December 31, 2005....     $ (63)     $ 100     $ 37
                                                                 =====      =====     ====
</Table>

-------------------------
(a)  Reflects only the initial premium payments (receipts) for new contracts. No
     unrealized gains or losses were recognized at the inception of any new
     contracts.

(b)  Reflects changes in price and net increase (decrease) of forward positions
     as well as changes to present value and credit reserves.

<Table>
<Caption>
                                                                     FAIR VALUE OF NON-TRADING CONTRACTS AT
                                                                                DECEMBER 31, 2005
                                                                -------------------------------------------------
                                                                               MATURITY (IN YEARS)
                                                    TOTAL       -------------------------------------------------
SOURCE OF FAIR VALUE                              FAIR VALUE    LESS THAN 1    1 TO 3    4 TO 5    GREATER THAN 5
--------------------                              ----------    -----------    ------    ------    --------------
                                                                            IN MILLIONS
<S>                                               <C>           <C>            <C>       <C>       <C>
Prices actively quoted........................       $ --          $  --        $ --      $ --         $  --
Prices obtained from external sources or based
  on models and other valuation methods.......        (63)            (8)        (15)      (32)           (8)
                                                     ----          -----        ----      ----         -----
Total.........................................       $(63)         $  (8)       $(15)     $(32)        $  (8)
                                                     ====          =====        ====      ====         =====
</Table>

                                      CMS-18
<PAGE>

<Table>
<Caption>
                                                                       FAIR VALUE OF TRADING CONTRACTS AT
                                                                                DECEMBER 31, 2005
                                                                -------------------------------------------------
                                                                               MATURITY (IN YEARS)
                                                    TOTAL       -------------------------------------------------
SOURCE OF FAIR VALUE                              FAIR VALUE    LESS THAN 1    1 TO 3    4 TO 5    GREATER THAN 5
--------------------                              ----------    -----------    ------    ------    --------------
                                                                            IN MILLIONS
<S>                                               <C>           <C>            <C>       <C>       <C>
Prices actively quoted........................       $(57)          $(6)        $(46)     $(5)         $  --
Prices obtained from external sources or based
  on models and other valuation methods.......        157            47           66       37              7
                                                     ----           ---         ----      ---          -----
Total.........................................       $100           $41         $ 20      $32          $   7
                                                     ====           ===         ====      ===          =====
</Table>

     MARKET RISK INFORMATION: We are exposed to market risks including, but not
limited to, changes in interest rates, commodity prices, currency exchange
rates, and equity security prices. We may use various contracts to manage these
risks, including swaps, options, futures, and forward contracts. We enter into
these risk management contracts using established policies and procedures, under
the direction of both:

     - an executive oversight committee consisting of senior management
       representatives, and

     - a risk committee consisting of business unit managers.

     Our intention is that any increases or decreases in the value of these
contracts will be offset by an opposite change in the value of the item at risk.

     These contracts contain credit risk, which is the risk that counterparties,
primarily financial institutions and energy marketers, will fail to perform
their contractual obligations. We reduce this risk through established credit
policies, which include performing financial credit reviews of our
counterparties. We determine our counterparties' credit quality using a number
of factors, including credit ratings, disclosed financial condition, and
collateral requirements. If terms permit, we use standard agreements that allow
us to net positive and negative exposures associated with the same counterparty.
Based on these policies, our current exposures, and our credit reserves, we do
not expect a material adverse effect on our financial position or earnings as a
result of counterparty nonperformance.

     The following risk sensitivities indicate the potential loss in fair value,
cash flows, or future earnings from our financial instruments, including our
derivative contracts, assuming a hypothetical unfavorable change in market rates
or prices of 10 percent. Changes in excess of the amounts shown in the
sensitivity analyses could occur if changes in market rates or prices exceed the
10 percent shift used for the analyses.

     Interest Rate Risk: We are exposed to interest rate risk resulting from
issuing fixed-rate and variable-rate financing instruments, and from interest
rate swap agreements. We use a combination of these instruments to manage this
risk as deemed appropriate, based upon market conditions. These strategies are
designed to provide and maintain a balance between risk and the lowest cost of
capital.

     Interest Rate Risk Sensitivity Analysis (assuming an unfavorable change in
market interest rates of 10 percent):

<Table>
<Caption>
DECEMBER 31                                                     2005    2004
-----------                                                     ----    ----
                                                                IN MILLIONS
<S>                                                             <C>     <C>
Variable-rate financing -- before-tax annual earnings
  exposure..................................................    $  4    $  2
Fixed-rate financing -- potential REDUCTION in fair
  value(a)..................................................     223     216
</Table>

-------------------------
(a)  Fair value exposure could only be realized if we repurchased all of our
     fixed-rate financing.

     Certain equity method investees have entered into interest rate swaps.
These instruments are not required to be included in the sensitivity analysis,
but can have an impact on financial results.

     Commodity Price Risk: Operating in the energy industry, we are exposed to
commodity price risk, which arises from fluctuations in the price of
electricity, natural gas, coal, and other commodities. Commodity prices are
influenced by a number of factors, including weather, changes in supply and
demand, and liquidity of commodity markets. In order to manage commodity price
risk, we enter into various non-trading derivative contracts, such as

                                      CMS-19
<PAGE>

gas supply call and put options, forward purchase and sale contracts for
electricity and natural gas, long-term gas contracts, gas futures, and gas
swaps. We also enter into trading derivative contracts, including electric and
gas options and swaps, and gas futures. For additional details on these
contracts, see Note 6, Financial and Derivative Instruments.

     Commodity Price Risk Sensitivity Analysis (assuming an unfavorable change
in market prices of 10 percent):

<Table>
<Caption>
DECEMBER 31                                                     2005    2004
-----------                                                     ----    ----
                                                                IN MILLIONS
<S>                                                             <C>     <C>
Potential REDUCTION in fair value:
  Non-trading contracts
     Gas supply option contracts............................    $ 1     $ 1
     FTRs...................................................     --      --
     CMS ERM electric and gas forward contracts.............     --      10
     Derivative contracts associated with the MCV
      Partnership:
       Long-term gas contracts(a)...........................     39      17
       Gas futures and swaps................................     48      41
Trading contracts
     Electricity-related option contracts...................      2      --
     Electricity-related swaps..............................     13      --
     Gas-related option contracts...........................      1       3
     Gas-related swaps and futures..........................      4       7
</Table>

-------------------------
(a)  The increased potential reduction in fair value for the MCV Partnership's
     long-term gas contracts is due to the increased number of contracts
     accounted for as derivatives as a result of the RCP.

     Currency Exchange Risk: Because of our investments in foreign operations
and equity interests in various international projects, we are exposed to
currency exchange risk. In order to protect the company from the risk associated
with unfavorable changes in currency exchange rates, which could materially
affect cash flow, we may use risk mitigating instruments. These instruments,
such as forward exchange contracts, allow us to hedge currency exchange rates.
At December 31, 2005, we had no outstanding foreign exchange contracts.

     Investment Securities Price Risk: Our investments in debt and equity
securities are exposed to changes in interest rates and price fluctuations in
equity markets. The following table shows the potential effect of adverse
changes in interest rates and fluctuations in equity prices on our
available-for-sale investments.

     Investment Securities Price Risk Sensitivity Analysis (assuming an
unfavorable change in market prices of 10 percent):

<Table>
<Caption>
DECEMBER 31                                                     2005    2004
-----------                                                     ----    ----
                                                                IN MILLIONS
<S>                                                             <C>     <C>
Potential REDUCTION in fair value of available-for-sale
  equity securities (primarily SERP investments):...........     $5      $5
</Table>

     Consumers maintains trust funds, as required by the NRC, for the purpose of
funding certain costs of nuclear plant decommissioning. At December 31, 2005 and
2004, these funds were invested primarily in equity securities, fixed-rate,
fixed-income debt securities, and cash and cash equivalents, and are recorded at
fair value on our Consolidated Balance Sheets. Those investments are exposed to
price fluctuations in equity markets and changes in interest rates. Because the
accounting for nuclear plant decommissioning recognizes that costs are recovered
through Consumers' electric rates, fluctuations in equity prices or interest
rates do not affect our earnings or cash flows.

     For additional details on market risk and derivative activities, see Note
6, Financial and Derivative Instruments.

                                      CMS-20
<PAGE>

ACCOUNTING FOR PENSION AND OPEB

     Pension: We have established external trust funds to provide retirement
pension benefits to our employees under a non-contributory, defined benefit
Pension Plan. We implemented a cash balance plan for certain employees hired
after June 30, 2003. On September 1, 2005, we implemented the DCCP.

     The DCCP provides an employer cash contribution of 5 percent of base pay to
the existing Employees' Savings Plan. No employee contribution is required in
order to receive the plan's employer contribution. All employees hired on and
after September 1, 2005 participate in this plan as part of their retirement
benefit program. Cash balance pension plan participants also participate in the
DCCP as of September 1, 2005. Additional pay credits under the cash balance
pension plan were discontinued as of that date. We use SFAS No. 87 to account
for pension costs.

     401(k): We resumed the employer's match in CMS Energy Common Stock in our
401(k) Savings Plan on January 1, 2005. On September 1, 2005, employees enrolled
in the company's 401(k) Savings Plan had their employer match increased from 50
percent to 60 percent on eligible contributions up to the first six percent of
an employee's wages.

     OPEB: We provide postretirement health and life benefits under our OPEB
plan to substantially all our retired employees. We use SFAS No. 106 to account
for other postretirement benefit costs.

     Liabilities for both pension and OPEB are recorded on the balance sheet at
the present value of their future obligations, net of any plan assets. The
calculation of the liabilities and associated expenses requires the expertise of
actuaries. Many assumptions are made, including:

     - life expectancies,

     - present-value discount rates,

     - expected long-term rate of return on plan assets,

     - rate of compensation increases, and

     - anticipated health care costs.

     Any change in these assumptions can change significantly the liability and
associated expenses recognized in any given year.

     The following table provides an estimate of our pension cost, OPEB cost,
and cash contributions for the next three years:

<Table>
<Caption>
EXPECTED COSTS                                                PENSION COST    OPEB COST    CONTRIBUTIONS
--------------                                                ------------    ---------    -------------
                                                                             IN MILLIONS
<S>                                                           <C>             <C>          <C>
2006......................................................        $ 97           $40           $ 76
2007......................................................         107            36            175
2008......................................................         103            32            119
</Table>

     Actual future pension cost and contributions will depend on future
investment performance, changes in future discount rates and various other
factors related to the populations participating in the Pension Plan.

     Lowering the expected long-term rate of return on the Pension Plan assets
by 0.25 percent (from 8.50 percent to 8.25 percent) would increase estimated
pension cost for 2006 by $3 million. Lowering the discount rate by 0.25 percent
(from 5.75 percent to 5.50 percent) would increase estimated pension cost for
2006 by $1 million.

     For additional details on postretirement benefits, see Note 7, Retirement
Benefits.

ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS

     SFAS No. 143, as clarified by FASB Interpretation No. 47, requires
companies to record the fair value of the cost to remove assets at the end of
their useful lives, if there is a legal obligation to remove them. We have legal

                                      CMS-21
<PAGE>

obligations to remove some of our assets, including our nuclear plants, at the
end of their useful lives. For Consumers, as required by SFAS No. 71, we account
for the implementation of this standard by recording regulatory assets and
liabilities instead of a cumulative effect of a change in accounting principle.

     The fair value of ARO liabilities has been calculated using an expected
present value technique. This technique reflects assumptions, such as costs,
inflation, and profit margin that third parties would consider to assume the
settlement of the obligation. Fair value, to the extent possible, should include
a market risk premium for unforeseeable circumstances. No market risk premium
was included in our ARO fair value estimate since a reasonable estimate could
not be made.

     If a reasonable estimate of fair value cannot be made in the period in
which the ARO is incurred, such as for assets with indeterminate lives, the
liability is recognized when a reasonable estimate of fair value can be made.
Generally, electric and gas transmission and distribution assets have
indeterminate lives. Retirement cash flows cannot be determined and there is a
low probability of a retirement date. Therefore, no liability has been recorded
for these assets or associated obligations related to potential future
abandonment. In addition, no liability has been recorded for assets that have
insignificant cumulative disposal costs, such as substation batteries. The
measurement of the ARO liabilities for Palisades and Big Rock include use of
decommissioning studies that largely utilize third-party cost estimates. For
additional details on ARO, see Note 8, Asset Retirement Obligations.

ACCOUNTING FOR NUCLEAR DECOMMISSIONING COSTS

     The MPSC and the FERC regulate the recovery of costs to decommission, or
remove from service, our Big Rock and Palisades nuclear plants. Our
decommissioning cost estimates for the Big Rock and Palisades plants assume:

     - each plant site will be restored to conform to the adjacent landscape,

     - all contaminated equipment and material will be removed and disposed of
       in a licensed burial facility, and

     - the site will be released for unrestricted use.

     Independent contractors with expertise in decommissioning have helped us
develop decommissioning cost estimates. Various inflation rates for labor,
non-labor, and contaminated equipment disposal costs are used to escalate these
cost estimates to the future decommissioning cost. A portion of future
decommissioning cost will result from the failure of the DOE to remove fuel from
the sites, as required by the Nuclear Waste Policy Act of 1982.

     We have established external trust funds to finance the decommissioning of
both plants. We record the trust fund balances as a non-current asset on our
Consolidated Balance Sheets. The decommissioning trust funds include equities
and fixed-income investments. Equities will be converted to fixed-income
investments during decommissioning, and fixed-income investments are converted
to cash as needed. The costs of decommissioning these sites and the adequacy of
the trust funds could be affected by:

     - variances from expected trust earnings,

     - a lower recovery of costs from the DOE and lower rate recovery from
       customers, and

     - changes in decommissioning technology, regulations, estimates, or
       assumptions.

     Based on current projections, the current level of funds provided by the
trusts is not adequate to fund fully the decommissioning of Big Rock or
Palisades. This is due in part to the DOE's failure to accept the spent nuclear
fuel on schedule and lower returns on the trust funds. We are attempting to
recover our additional costs for storing spent nuclear fuel through litigation.
At this time, we cannot determine what impact a license renewal for the
Palisades plant will have on decommissioning costs or the adequacy of funding.
For additional details, see Note 3, Contingencies, "Other Consumers' Electric
Utility Contingencies -- Nuclear Plant Decommissioning" and "Nuclear Matters,"
and Note 8, Asset Retirement Obligations.

                                      CMS-22
<PAGE>

CAPITAL RESOURCES AND LIQUIDITY

     Our liquidity and capital requirements are a function of our:

     - results of operations,

     - capital expenditures,

     - contractual obligations,

     - debt maturities,

     - working capital needs, and

     - collateral requirements.

     During the summer months, we purchase natural gas and store it for resale
primarily during the winter heating season. In 2005, the market price for
natural gas increased substantially. Although our prudent natural gas purchases
are recoverable from our customers, as gas prices increase, the amount paid for
natural gas stored as inventory requires additional liquidity due to the timing
of the cost recoveries. We have credit agreements with our commodity suppliers
and those agreements contain terms that have resulted in margin calls.
Additional margin calls or other credit support may be required if agency
ratings are lowered or if market conditions remain unfavorable relative to our
obligations to those parties.

     Our current financial plan includes controlling operating expenses and
capital expenditures and evaluating market conditions for financing
opportunities. Due to the adverse impact of the MCV Partnership asset impairment
charge recorded in September 2005, Consumers' ability to issue FMB as primary
obligations or as collateral for financing is expected to be limited to $298
million through September 30, 2006. After September 30, 2006, Consumers' ability
to issue FMB in excess of $298 million is based on achieving a two-times FMB
interest coverage ratio.

     We believe the following items will be sufficient to meet our liquidity
needs:

     - our current level of cash and revolving credit facilities,

     - our ability to access junior secured and unsecured borrowing capacity in
       the capital markets, and

     - our anticipated cash flows from operating and investing activities.

     We have not made a specific determination concerning the reinstatement of
common stock dividends. The Board of Directors may reconsider or revise its
dividend policy based upon certain conditions, including our results of
operations, financial condition, and capital requirements, as well as other
relevant factors.

CASH POSITION, INVESTING, AND FINANCING

     Our operating, investing, and financing activities meet consolidated cash
needs. At December 31, 2005, $1.045 billion consolidated cash was on hand, which
includes $198 million of restricted cash and restricted short-term investments
and $367 million from the entities consolidated pursuant to FASB Interpretation
No. 46. For additional details, see Note 16, Consolidation of Variable Interest
Entities.

     Our primary ongoing source of cash is dividends and other distributions
from our subsidiaries. For the year ended December 31, 2005, Consumers paid $277
million in common stock dividends and Enterprises paid $297 million in common
stock dividends and other distributions to CMS Energy.

                                      CMS-23
<PAGE>

SUMMARY OF CASH FLOWS:

<Table>
<Caption>
                                                                2005     2004     2003
                                                                ----     ----     ----
                                                                      IN MILLIONS
<S>                                                             <C>      <C>      <C>
Net cash provided by (used in):
  Operating activities......................................    $ 646    $ 398    $(250)
  Investing activities......................................     (541)    (392)     203
                                                                -----    -----    -----
Net cash provided by (used in) operating and investing
  activities................................................      105        6      (47)
  Financing activities......................................       74      (43)     229
Effect of exchange rates on cash............................       (1)      --       (1)
                                                                -----    -----    -----
Net Increase (Decrease) in Cash and Cash Equivalents........    $ 178    $ (37)   $ 181
                                                                =====    =====    =====
</Table>

OPERATING ACTIVITIES:

     2005: Net cash provided by operating activities increased $248 million
versus the same period in 2004. Included in cash provided by operations is a
tentative insurance settlement, a decrease in prepaid gas margin call costs, the
positive effect of rising gas prices on accounts payable and MCV gas supplier
funds on deposit, and other timing differences. These increases were offset
partially by the negative effect of rising gas prices on accounts receivable and
inventories.

     2004: Net cash provided by operating activities was $398 million in 2004
compared to net cash used in operating activities of $250 million in 2003. The
increase of $648 million primarily represents the absence, in 2004, of $560
million in pension contributions made in 2003 and the reduced effect of rising
gas prices on inventory. These changes were offset partially by increases in
accounts receivable due to higher gas prices and the net effect of the sale of
CMS ERM's wholesale gas and power contracts in 2003 resulting from our continued
focus to optimize cash flow through the sale of non-strategic assets.

INVESTING ACTIVITIES:

     2005: Net cash used in investing activities increased $149 million versus
the same period in 2004 primarily due to an increase in restricted cash and
restricted short-term investments of $296 million combined with a decrease in
proceeds from asset sales of $158 million. These changes were offset partially
by a net increase in short-term investment proceeds of $218 million and a
decrease in investments in unconsolidated subsidiaries of $71 million. The
increase in restricted cash and restricted short-term investments was due to a
deposit made with a trustee for extinguishing the current portion of long-term
debt -- related parties.

     2004: Net cash used in investing activities increased $595 million
primarily due to a decrease in asset sale proceeds of $720 million and an
increase in investments in unconsolidated subsidiaries of $71 million. In 2003,
we sold Panhandle, Field Services, and CMS ERM's wholesale gas and power
contracts. Our 2004 $71 million investment was primarily for our equity interest
in Shuweihat. These changes were offset partially by a decrease in the amount of
cash restricted of $308 million resulting from our improved financial condition.
In 2004, $145 million in restricted cash was no longer required to be held as
collateral for letters of credit.

FINANCING ACTIVITIES:

     2005: Net cash provided by financing activities increased $117 million
versus the same period in 2004 primarily due to a decrease in debt retirements
of $122 million.

     2004: Net cash used in financing activities increased $272 million
primarily due to a decrease of $232 million in net proceeds from borrowings.

     For additional details on long-term debt activity, see Note 4, Financings
and Capitalization.

                                      CMS-24
<PAGE>

OBLIGATIONS AND COMMITMENTS

     CONTRACTUAL OBLIGATIONS: The following table summarizes our contractual
cash obligations for each of the periods presented. The table shows the timing
and effect that such obligations are expected to have on our liquidity and cash
flow in future periods. The table excludes all amounts classified as current
liabilities on our Consolidated Balance Sheets, other than the current portion
of long-term debt and capital and finance leases. The majority of current
liabilities will be paid in cash in 2006.

<Table>
<Caption>
                                                                       PAYMENTS DUE
                                              ---------------------------------------------------------------
          CONTRACTUAL OBLIGATIONS                        LESS THAN      ONE TO        THREE TO     MORE THAN
            AT DECEMBER 31, 2005               TOTAL     ONE YEAR     THREE YEARS    FIVE YEARS    FIVE YEARS
          -----------------------              -----     ---------    -----------    ----------    ----------
                                                                        IN MILLIONS
<S>                                           <C>        <C>          <C>            <C>           <C>
Long-term debt..............................  $ 7,089     $  289        $1,397         $1,529        $3,874
Long-term debt -- related parties...........      307        129            --             --           178
Interest payments on long-term debt.........    3,429        432           787            552         1,658
Capital and finance leases..................      335         27            55             51           202
Interest payments on capital and finance
  leases....................................      222         30            60             50            82
Operating leases............................      135         21            38             27            49
Purchase obligations........................    9,036      2,446         2,499          1,398         2,693
Long-term service agreements................      194         25            23             30           116
                                              -------     ------        ------         ------        ------
  Total contractual obligations.............  $20,747     $3,399        $4,859         $3,637        $8,852
                                              =======     ======        ======         ======        ======
</Table>

     Long-Term Debt: The amounts in the preceding table represent the principal
amounts due on outstanding debt obligations, current and long-term, at December
31, 2005. For additional details on long-term debt, see Note 4, Financings and
Capitalization.

     Interest payments on long-term debt: The amounts in the preceding table
represent the currently scheduled interest payments on both variable and fixed
rate long-term debt and long-term debt -- related parties, current and
long-term. Variable interest payments are based on contractual rates in effect
at December 31, 2005.

     Capital and finance leases: The amounts in the preceding table represent
the minimum lease payments payable under our capital and finance leases. They
are comprised mainly of the leased portion of the MCV Facility, leased service
vehicles, and leased office furniture.

     Interest payments on capital and finance leases: The amounts in the
preceding table represent imputed interest in the capital leases and currently
scheduled interest payments on the finance leases.

     Operating Leases: The amounts in the preceding table represent the minimum
noncancelable lease payments under our leases of railroad cars, certain
vehicles, and miscellaneous office buildings and equipment, which are accounted
for as operating leases.

     Purchase Obligations: The amounts in the preceding table represent
long-term contracts for purchase of commodities and services. These obligations
include operating contracts used to assure adequate supply with generating
facilities that meet PURPA requirements. The commodities and services include:

     - natural gas,

     - electricity, and

     - coal and associated transportation.

     Our purchase obligations include long-term power purchase agreements with
various generating plants, which require us to make monthly capacity payments
based on the plants' availability or deliverability. These payments will
approximate $8 million per month during 2006. If a plant is not available to
deliver electricity, we are not obligated to make the capacity payments to the
plant for that period of time. For additional details on power supply costs, see
"Electric Utility Results of Operations" within this MD&A and Note 3,
Contingencies, "Consumers' Electric Utility Rate Matters -- Power Supply Costs."

                                      CMS-25
<PAGE>

     Long-term Service Agreements: The amounts in the preceding table represent
obligations of the MCV Partnership, primarily the cost of the current MCV
Facility maintenance service agreements and cost of spare parts.

     REVOLVING CREDIT FACILITIES: At December 31, 2005, CMS Energy had $204
million available, Consumers had $464 million available, and the MCV Partnership
had $48 million available in secured revolving credit facilities. The facilities
are available for general corporate purposes, working capital, and letters of
credit. For additional details on revolving credit facilities, see Note 4,
Financings and Capitalization.

     OFF-BALANCE SHEET ARRANGEMENTS: CMS Energy and certain of its subsidiaries
enter into various arrangements in the normal course of business to facilitate
commercial transactions with third parties. These arrangements include
indemnifications, letters of credit, surety bonds, and financial and performance
guarantees.

     We enter into agreements containing indemnifications standard in the
industry and indemnifications specific to a transaction, such as the sale of a
subsidiary. Indemnifications are usually agreements to reimburse other companies
if those companies incur losses due to third-party claims or breach of contract
terms. Banks, on our behalf, issue letters of credit guaranteeing payment to a
third party. Letters of credit substitute the bank's credit for ours and reduce
credit risk for the third-party beneficiary. We monitor these obligations and
believe it is unlikely that we would be required to perform or otherwise incur
any material losses associated with these guarantees. For additional details on
these and other guarantee arrangements, see Note 3, Contingencies, "Other
Contingencies -- FASB Interpretation No. 45, Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others."

     Non-recourse Debt: Our share of unconsolidated debt associated with
partnerships and joint ventures in which we have a minority interest is
non-recourse and totals $1.271 billion at December 31, 2005. The timing of the
payments of non-recourse debt only affects the cash flow and liquidity of the
partnerships and joint ventures. For summarized financial information of our
investments in certain partnerships and joint ventures, see Note 13, Equity
Method Investments.

     Sale of Accounts Receivable: Under a revolving accounts receivable sales
program, Consumers may sell up to $325 million of certain accounts receivable.
The highly liquid and efficient market for securitized financial assets provides
a lower cost source of funding compared to unsecured debt. For additional
details, see Note 4, Financings and Capitalization.

     DIVIDEND RESTRICTIONS: For details on dividend restrictions, see Note 4,
Financings and Capitalization.

     DEBT CREDIT RATING: In November 2005, S&P placed CMS Energy's and
Consumers' debt credit ratings on CreditWatch with negative implications. In
January 2006, S&P removed the ratings from CreditWatch with negative
implications and affirmed CMS Energy's and Consumers' debt credit ratings with a
stable outlook.

     BOND REPURCHASE: In January and through February 23, 2006, we have
purchased in the open market or contracted to purchase approximately $41 million
principal amount of our 9.875 percent senior notes due 2007.

     CAPITAL EXPENDITURES: We estimate that we will make the following capital
expenditures, including new lease commitments, during 2006 through 2008. We
prepare these estimates for planning purposes and may revise them.

<Table>
<Caption>
YEARS ENDING DECEMBER 31                                      2006      2007      2008
------------------------                                      ----      ----      ----
                                                                    IN MILLIONS
<S>                                                           <C>       <C>       <C>
Electric utility operations(a)(b)...........................  $536      $615      $505
Gas utility operations(b)...................................   187       195       240
Enterprises.................................................    17         5        --
                                                              ----      ----      ----
                                                              $740      $815      $745
                                                              ====      ====      ====
</Table>

-------------------------
(a)  These amounts include estimates for capital expenditures that may be
     required by recent revisions to the Clean Air Act's national air quality
     standards.

                                      CMS-26
<PAGE>

(b)  These amounts include estimates for capital expenditures related to
     information technology projects, facility improvements, and vehicle
     leasing.

OUTLOOK

CORPORATE OUTLOOK

     Over the next few years, our business strategy will focus on reducing
parent company debt, growing earnings, and positioning us to make new
investments that complement our strengths.

     Our primary focus with respect to our non-utility businesses has been to
optimize cash flow and further reduce our business risk and leverage through the
sale of non-strategic assets, and to improve earnings and cash flow from
businesses we retain. Although most of our asset sales program is complete, we
still may sell certain remaining businesses or assets as opportunities arise.
The percentage of our future earnings relating to our equity method investments
may increase and our total future earnings may depend more significantly upon
the performance of those investments. For summarized financial information of
our equity method investments, see Note 13, Equity Method Investments.

ELECTRIC UTILITY BUSINESS OUTLOOK

     GROWTH: Summer 2005 temperatures were higher than historical averages,
leading to increased demand from electric customers. As a result, growth in
electric deliveries in 2005, excluding transactions with other wholesale market
participants and other utilities, was more than three percent. In 2006, we
project electric deliveries to be about flat compared to the levels experienced
in 2005. This short-term outlook for 2006 assumes a recovering economy and
normal weather conditions throughout the year.

     Over the next five years, we expect electric deliveries to grow at an
average rate of approximately two percent per year. However, such growth is
dependent on a modestly growing customer base and recovery of the Michigan
economy. This growth rate includes both full-service sales and delivery service
to customers who choose to buy generation service from an alternative electric
supplier, but excludes transactions with other wholesale market participants and
other electric utilities. This growth rate reflects a long-range expected trend
of growth. Growth from year to year may vary from this trend due to customer
response to fluctuations in weather conditions and changes in economic
conditions, including utilization and expansion or contraction of manufacturing
facilities.

     ELECTRIC RATE CASE: In December 2004, we filed an application with the MPSC
to increase our retail electric base rates. The electric rate case filing
requested an annual increase in revenues of approximately $320 million, which we
revised in August 2005 to approximately $197 million. The primary reasons for
our electric rate case were increased system maintenance and improvement costs,
Clean Air Act-related expenditures, and employee pension costs. In December
2005, the MPSC issued an order that allows a base rate increase in the annual
amount of $86 million, establishes an 11.15 percent authorized return on equity,
and recognizes the impacts on our projected equity investment (infusions and
retained earnings) in 2006. The base rate increase includes a contribution of
$27 million to Michigan's Low Income and Energy Efficiency Fund. Portions of the
base rate increase are subject to refund if expenditures in certain categories
are lower than assumed in establishing rates. New electric base rates became
effective in mid-January 2006.

     In January 2006, an intervenor in the electric rate case filed a petition
with the MPSC to seek rehearing or clarification on certain issues addressed in
the December 2005 order. In January 2006, we also filed a petition to seek
rehearing or clarification on certain issues in the order. We cannot predict the
outcome of these petitions.

     ELECTRIC TRANSMISSION EXPENSES: In December 2005, the FERC issued an order
that conditionally accepts an application from METC, which provides electric
transmission service to us, to increase substantially the transmission rates it
will charge us in 2006. We are attempting to recover these costs through our
2006 PSCR plan case. In December 2005, the MPSC issued an order that temporarily
excludes a portion of the increased costs from our PSCR charge, which began in
January 2006. The PSCR process allows recovery of all reasonable and prudent
power supply costs. However, we cannot predict when full recovery of these
transmission costs will commence. To the extent that we incur and are unable to
collect these increased costs in a timely manner, our

                                      CMS-27
<PAGE>

cash flows from electric utility operations will be affected negatively. For
additional details, see Note 3, Contingencies, "Consumers' Electric Utility Rate
Matters -- Power Supply Costs."

     ELECTRIC RESERVE MARGIN: To reduce the risk of high electric prices during
peak demand periods and to achieve our reserve margin target, we employ a
strategy of purchasing electric capacity and energy contracts for the physical
delivery of electricity primarily in the summer months and to a lesser degree in
the winter months. We establish a reserve margin target to address various
scenarios and contingencies so that the probability of interrupting service to
retail customers because of a supply shortage is no greater than an
industry-recognized standard. However, even with the reserve margin target,
additional spot purchases may be required during periods when electric prices
are high.

     We are planning currently for a reserve margin of approximately 11 percent
for summer 2006, or supply resources equal to 111 percent of projected firm
summer peak load. Of the 2006 supply resources target of 111 percent, we expect
to meet approximately 96 percent from our electric generating plants and
long-term power purchase contracts, and approximately 15 percent from other
contractual arrangements. We have purchased capacity and energy contracts
covering partially the estimated reserve margin requirements for 2006 through
2010. As a result, we have recognized an asset of $6 million for unexpired
capacity and energy contracts at December 31, 2005.

     ELECTRIC CAPACITY NEEDS FORUM: In January 2006, the MPSC Staff issued a
report on future electric capacity needs in the state of Michigan. The report
indicated that existing generation resources are adequate in the short term, but
could be insufficient to maintain reliability standards by 2009. The report also
indicated that new baseload electric generation may be needed by 2011. The MPSC
Staff recommended an approval and bid process for new power plants. To address
revenue stability risks, the Staff also recommended a special reliability charge
a utility would assess on all electric distribution customers. In January 2006,
the MPSC solicited comments on the capacity needs report and announced a public
hearing for March 2006. We will continue to participate in this forum as the
MPSC develops ratemaking policy to address future electric capacity needs.

     INDUSTRIAL REVENUE OUTLOOK: Our electric utility customer base includes a
mix of residential, commercial, and diversified industrial customers, the
largest segment of which is the automotive industry. In October 2005, Delphi
Corporation (Delphi) filed for Chapter 11 bankruptcy protection. Delphi is the
nation's largest automotive supplier headquartered in Troy, Michigan, and is a
large industrial customer of Consumers. Our electric utility operations are not
dependent upon a single customer, and we do not believe that this event will
have a material adverse effect on our financial condition. In November 2005,
General Motors Corporation, also a large industrial customer of Consumers,
announced plans to reduce manufacturing capacity, including certain operations
in Michigan. We cannot predict the impact of these restructuring plans or
possible future actions by other industrial customers. Continued degradation of
the industrial customer base would have a negative impact on electric utility
revenues.

     ENERGY MARKET DEVELOPMENT: The MISO began operating the Midwest Energy
Market on April 1, 2005. The Midwest Energy Market includes a day-ahead and
real-time energy market and centralized generation dispatch for market
participants. We are a participant in this energy market. The intention of this
market is to meet load requirements in the region reliably and efficiently, to
improve management of congestion on the grid, and to centralize dispatch of
generation throughout the region. The MISO is now responsible for the
reliability and economic dispatch in the entire MISO area, which covers parts of
15 states and Manitoba, including our service territory.

     The settlement of charges for each operating day of the Midwest Energy
Market invokes the issuance of multiple settlement statements over a 155-day
period through March 2006 and a 365-day period beginning in April 2006. This
extended settlement period is designed to allow for adjustments associated with
the receipt of complete billing information and other adjustments. When
adjustments are necessary, the MISO bills market participants on a retroactive
basis, covering several months, which may result in either a positive or a
negative billing adjustment. We record an expense accrual for future adjustments
based on historical experience.

     COAL DELIVERY DISRUPTIONS: In May 2005, western coal rail carriers
experienced derailments and significant service disruptions that affected all
shippers of western coal from Wyoming mines as well as coal producers from

                                      CMS-28
<PAGE>

May 2005 through June 2005. Under contractual Force Majeure provisions, the coal
tonnage not delivered during this period was not made up. Although we
experienced some impact on coal shipments during the rail repair period, our
inventories have remained within historical levels during the winter period,
though at lower levels than planned before the disruptions occurred. Based on
our present delivery experience, projections, and inventory, we believe we will
continue to have adequate coal supply to allow for normal dispatch of our
coal-fired generating units.

     RENEWABLE RESOURCES PROGRAM: In January 2005, in collaboration with the
MPSC, we established a RRP. Under the RRP, we purchase energy from approved
renewable sources, which include solar, wind, geothermal, biomass, and
hydroelectric suppliers. In August 2005, we secured long-term renewable energy
supply contracts that the MPSC approved in October 2005. Customers are able to
participate in the RRP in accordance with tariffs approved by the MPSC. The MPSC
authorized recovery of above-market costs for the RRP by establishing a fund
that consists of an annual contribution from savings generated by the RCP, a
surcharge imposed by the MPSC on all customers, and contributions from customers
that choose to participate in the RRP. In February 2005, the Attorney General
filed appeals of the MPSC orders providing funding for the RRP in the Michigan
Court of Appeals. In November 2005, the Michigan Court of Appeals issued an
order that reversed the portion of the MPSC order that allows a surcharge
imposed on all customers. The RRP will continue to be funded by savings
generated by the RCP and by customers that participate in the program.

     BURIAL OF OVERHEAD POWER LINES: In September 2004, the Michigan Court of
Appeals upheld a lower court decision that requires Detroit Edison to obey a
municipal ordinance enacted by the City of Taylor, Michigan. The ordinance
requires Detroit Edison to bury a section of its overhead power lines at its own
expense. Detroit Edison filed an appeal with the Michigan Supreme Court and, in
October 2005, the Michigan Supreme Court agreed to review the lower court's
decision. Consumers and other industry parties filed a brief in support of
Detroit Edison's appeal. Unless overturned by the Michigan Supreme Court, the
decision could encourage other municipalities to adopt similar ordinances, as
has occurred or is under discussion in a few municipalities in our service
territory. If incurred, we would seek recovery of these costs from our customers
located in the municipality affected, subject to MPSC approval. This case has
potentially broad ramifications for the electric utility industry in Michigan;
however, at this time, we cannot predict the outcome of this matter.

ELECTRIC UTILITY BUSINESS UNCERTAINTIES

     Several electric business trends or uncertainties may affect our financial
results and condition. These trends or uncertainties have, or we reasonably
expect could have, a material impact on revenues or income from continuing
electric operations.

     ELECTRIC ENVIRONMENTAL ESTIMATES: Our operations are subject to
environmental laws and regulations. Costs to operate our facilities in
compliance with these laws and regulations generally have been recovered in
customer rates.

     Clean Air: Compliance with the federal Clean Air Act and resulting
regulations has been, and will continue to be, a significant focus for us. The
Nitrogen Oxide State Implementation Plan requires significant reductions in
nitrogen oxide emissions. To comply with the regulations, we expect to incur
capital expenditures totaling $815 million. The key assumptions in the capital
expenditure estimate include:

     - construction commodity prices, especially construction material and
       labor,

     - project completion schedules,

     - cost escalation factor used to estimate future years' costs, and

     - allowance for funds used during construction (AFUDC) rate.

     Our current capital cost estimates include an escalation rate of 2.6
percent and an AFUDC capitalization rate of 8.3 percent. As of December 2005, we
had incurred $605 million in capital expenditures to comply with the federal
Clean Air Act and resulting regulations and anticipate that the remaining $210
million of capital expenditures will be made in 2006 through 2011. These
expenditures include installing selective catalytic control reduction technology
at four of our coal-fired electric plants. In addition to modifying coal-fired
electric plants,

                                      CMS-29
<PAGE>

our compliance plan includes the use of nitrogen oxide emission allowances until
all of the control equipment is operational in 2011. The nitrogen oxide emission
allowance annual expense is projected to be $10 million per year, which we
expect to recover from our customers. The projected annual expense is based on
market price forecasts and forecasts of regulatory provisions, known as
progressive flow control, that restrict the usage in any given year of
allowances banked from previous years. The allowances and their cost are
accounted for as inventory. The allowance inventory is expensed at the rolling
average cost as the coal-fired electric generating units emit nitrogen oxide.
The expense is recovered from our customers through the PSCR process.

     The EPA recently adopted a Clean Air Interstate Rule that requires
additional coal-fired electric plant emission controls for nitrogen oxides and
sulfur dioxide. The rule involves a two-phase program to reduce emissions of
sulfur dioxide by 71 percent and nitrogen oxides by 63 percent by 2015. The
final rule will require that we run our selective catalytic control technology
units year-round beginning in 2009 and may require that we purchase additional
nitrogen oxide allowances beginning in 2009.

     In addition to the selective catalytic control technology installed to meet
the nitrogen oxide standards, our current plan includes installation of flue gas
desulfurization scrubbers. The scrubbers are to be installed by 2014 to meet the
Phase I reduction requirements of the Clean Air Interstate Rule, at costs
similar to those to comply with the nitrogen oxide standards. We currently have
a surplus of sulfur dioxide allowances, which were granted by the EPA and are
accounted for as inventory. In January 2006, we sold some of our excess sulfur
dioxide allowances for $61 million and recognized the proceeds as a regulatory
liability.

     In May 2005, the EPA issued the Clean Air Mercury Rule, which requires
initial reductions of mercury emissions from coal-fired electric power plants by
2010 and further reductions by 2018. While the industry has not reached a
consensus on the technical methods for curtailing mercury emissions, our capital
and operating costs for mercury emissions reductions are expected to be
significantly less than what was required for selective catalytic reduction
technology used for nitrogen oxide compliance.

     In August 2005, the MDEQ filed a Motion to Intervene in a court challenge
to certain aspects of EPA's Clean Air Mercury Rule, asserting that the rule is
inadequate. The MDEQ has not indicated the direction that it will pursue to meet
or exceed the EPA requirements through state rulemaking. We are actively
participating in dialog with the MDEQ regarding potential paths for controlling
mercury emissions and meeting the EPA requirements. In October 2005, the EPA
announced it would reconsider certain aspects of the Clean Air Mercury Rule. We
cannot predict the outcome of this proceeding.

     Several legislative proposals have been introduced in the United States
Congress that would require reductions in emissions of greenhouse gases. We
cannot predict whether any federal mandatory greenhouse gas emission reduction
rules ultimately will be enacted, or the specific requirements of any of these
rules.

     To the extent that greenhouse gas emission reduction rules come into
effect, the mandatory emissions reduction requirements could have far-reaching
and significant implications for the energy sector. We cannot estimate the
potential effect of federal or state level greenhouse gas policy on our future
consolidated results of operations, cash flows, or financial position due to the
uncertain nature of the policies at this time. However, we stay abreast of and
engage in greenhouse gas policy developments and will continue to assess and
respond to their potential implications on our business operations.

     Water: In March 2004, the EPA issued rules that govern generating plant
cooling water intake systems. The new rules require significant reduction in
fish killed by operating equipment. Some of our facilities will be required to
comply with the new rules by 2007. We currently are performing the required
studies to determine the most cost-effective solutions for compliance.

     For additional details on electric environmental matters, see Note 3,
Contingencies, "Consumers' Electric Utility Contingencies -- Electric
Environmental Matters."

     COMPETITION AND REGULATORY RESTRUCTURING: The Customer Choice Act allows
all of our electric customers to buy electric generation service from us or from
an alternative electric supplier. At December 31, 2005, alternative electric
suppliers were providing 552 MW of generation service to ROA customers. This
amount

                                      CMS-30
<PAGE>

represents a decrease of 40 percent compared to December 31, 2004, and is 7
percent of our total distribution load. It is difficult to predict future ROA
customer trends.

     Section 10d(4) Regulatory Assets: In October 2004, we filed an application
with the MPSC seeking recovery of $628 million of Section 10d(4) Regulatory
Assets for the period June 2000 through December 2005. Of the $628 million, $152
million relates to the cost of money. In June 2005, the ALJ issued a proposal
for decision recommending the MPSC approve recovery of approximately $323
million in Section 10d(4) costs, which includes the cost of money through the
period of collection. In December 2005, the MPSC issued an order that authorized
us to recover the same costs recommended by the ALJ starting in January 2006.
However, instead of collecting these costs evenly over five years, the order
instructed us to collect 10 percent of the regulatory asset total in the first
year, 15 percent in the second year, and 25 percent in the third, fourth, and
fifth years. As a result, the total amount authorized for collection, including
carrying costs, was $333 million. In January 2006, we filed a petition for
rehearing with the MPSC that disputes the aspect of the order dealing with the
timing of our collection of costs approved for recovery in this case. We cannot
predict the outcome of this petition.

     Stranded Costs: Prior MPSC orders adopted a mechanism pursuant to the
Customer Choice Act to provide recovery of Stranded Costs that occur when
customers leave our system to purchase electricity from alternative suppliers.
In November 2005, we filed an application with the MPSC related to the
determination of 2004 Stranded Costs. Applying the Stranded Cost methodology
used in prior MPSC orders, we concluded that we experienced zero Stranded Costs
in 2004.

     Implementation Costs: In June 2005, the MPSC issued an order that
authorizes us to recover costs from the implementation of the Customer Choice
Act incurred during 2002 and 2003 totaling $6 million, plus the cost of money
through the period of collection. We pursued authorization at the FERC for the
MISO to reimburse us for Alliance RTO development costs. Included in this amount
is $2 million that the MPSC did not approve as part of our 2002 implementation
costs application. The FERC denied our request for reimbursement, and we
appealed the FERC ruling at the United States Court of Appeals for the District
of Columbia. In November 2005, the United States Court of Appeals for the
District of Columbia denied our appeal.

     Through and Out Rates: In December 2004, we began paying a transitional
charge pursuant to a FERC order eliminating regional "through and out" rates.
Through and out rates are applied to transmission transactions when a
transmission customer purchases electricity that travels through multiple
transmission pricing zones. Although the transitional charge ends in March 2006,
there are hearings scheduled for May 2006 at the FERC to discuss these charges.
The FERC hearings could result in refunds or additional transitional charges to
us. We cannot predict the outcome of these hearings.

     For additional details and material changes relating to the restructuring
of the electric utility industry and electric rate matters, see Note 3,
Contingencies, "Consumers' Electric Utility Restructuring Matters," and
"Consumers' Electric Utility Rate Matters."

OTHER ELECTRIC UTILITY BUSINESS UNCERTAINTIES

     MCV UNDERRECOVERIES: The MCV Partnership, which leases and operates the MCV
Facility, contracted to sell electricity to Consumers for a 35-year period
beginning in 1990. We hold a 49 percent partnership interest in the MCV
Partnership, and a 35 percent lessor interest in the MCV Facility.

     Under the MCV PPA, variable energy payments to the MCV Partnership are
based on the cost of coal burned at our coal plants and our operation and
maintenance expenses. However, the MCV Partnership's costs of producing
electricity are tied to the cost of natural gas. Natural gas prices have
increased substantially in recent years and throughout 2005. In 2005, the MCV
Partnership reevaluated the economics of operating the MCV Facility and recorded
an impairment charge. If natural gas prices remain at present levels or
increase, the operations of the MCV Facility would be adversely affected and
could result in the MCV Partnership failing to meet its obligations under the
sale and leaseback transactions and other contracts. For additional details on
the impairment of the MCV Facility, see Note 2, Asset Impairment Charges, Sales,
and Discontinued Operations. We are evaluating various alternatives in order to
develop a new long-term strategy with respect to the MCV Facility.

                                      CMS-31
<PAGE>

     Further, the cost that we incur under the MCV PPA exceeds the recovery
amount allowed by the MPSC. As a result, we estimate cash underrecoveries of
capacity and fixed energy payments of $55 million in 2006 and $39 million in
2007. However, Consumers' direct savings from the RCP, after allocating a
portion to customers, are used to offset our capacity and fixed energy
underrecoveries expense. After September 15, 2007, we expect to claim relief
under the regulatory out provision in the MCV PPA, thereby limiting our capacity
and fixed energy payments to the MCV Partnership to the amounts that we collect
from our customers. The effect of any such action would be to:

     - reduce cash flow to the MCV Partnership, which could have an adverse
       effect on the MCV Partnership's financial performance, and

     - eliminate our underrecoveries of capacity and fixed energy payments.

     The MCV Partnership has indicated that it may take issue with our exercise
of the regulatory out clause after September 15, 2007. We believe that the
clause is valid and fully effective, but cannot assure that it will prevail in
the event of a dispute. If we are successful in exercising the regulatory out
clause, the MCV Partnership may have the right to terminate the MCV PPA. The
MPSC's future actions on the capacity and fixed energy payments recoverable from
customers subsequent to September 15, 2007 may affect negatively the financial
performance of the MCV Partnership.

     For additional details on the MCV Partnership, see Note 3, Contingencies,
"Other Consumers' Electric Utility Contingencies -- The Midland Cogeneration
Venture."

     NUCLEAR MATTERS:

     Big Rock: Decommissioning of the site is nearing completion. Demolition of
the last remaining plant structure, the containment building, and removal of
remaining underground utilities and temporary office structures is expected to
be completed by the summer of 2006. Final radiological surveys will then be
completed including confirmatory surveys performed by the NRC to ensure that the
site meets all requirements for free, unrestricted release in accordance with
the NRC approved License Termination Plan (LTP) for the project. We anticipate
NRC approval to return approximately 485 acres of the site, including the area
formerly occupied by the nuclear plant, to a natural setting for unrestricted
use by early 2007. We expect another area of approximately 105 acres
encompassing the Big Rock Independent Spent Fuel Storage Installation (ISFSI),
where eight casks loaded with spent fuel and other high-level radioactive
material are stored, to be returned to a natural state within approximately two
years from the date the DOE finishes removing the spent fuel from Big Rock also
in accordance with the LTP.

     Palisades: In August 2005, the NRC completed its performance review of the
Palisades Nuclear Plant for the first half of the calendar year 2005. The NRC
determined that Palisades was operated in a manner that preserved public health
and safety and met all of the NRC's specific "cornerstone objectives." As of
August 2005, all inspection findings were classified as having very low safety
significance and all performance indicators show performance at a level
requiring no additional oversight. Based on the plant's performance, only
regularly scheduled inspections are planned through March 31, 2007.

     The amount of spent nuclear fuel at Palisades exceeds the plant's temporary
onsite wet storage pool capacity. We are using dry casks for temporary onsite
dry storage to supplement the wet storage pool capacity. As of January 2006, we
have loaded 29 dry casks with spent nuclear fuel.

     Palisades' current license from the NRC expires in 2011. In March 2005, the
NMC, which operates the Palisades plant, applied for a 20-year license renewal
for the plant on behalf of Consumers. Certain parties are seeking to intervene
and have requested a hearing on the application. The NRC has stated that it
expects to take 22-30 months to review a license renewal application. We expect
a decision from the NRC in 2007.

     Palisades, like other nuclear plants, has experienced cracking in reactor
head nozzle penetrations. Repairs to two nozzles were made in 2004. We have
authorized the purchase of a replacement reactor vessel closure head. The
replacement head is being manufactured and is scheduled to be installed in 2007.

                                      CMS-32
<PAGE>

     In December 2005, we announced plans to sell the Palisades nuclear plant
and enter into a long-term power purchase agreement with the new owner. We
believe a sale is the best option for our company, as it will reduce risk and
improve cash flow while retaining the benefits of the plant for customers.

     The Palisades sale will use a competitive bid process, providing interested
companies the option to bid on the plant, as well as the related decommissioning
liabilities and trust funds assets, and spent nuclear fuel at Palisades and Big
Rock. We expect to complete the sale in 2007.

     For additional details on nuclear plant decommissioning at Big Rock and
Palisades, see Note 3, Contingencies, "Other Consumers' Electric Utility
Contingencies -- Nuclear Plant Decommissioning."

GAS UTILITY BUSINESS OUTLOOK

     GROWTH: Over the next five years, we expect gas deliveries to be relatively
flat. Actual gas deliveries in future periods may be affected by:

     - fluctuations in weather patterns,

     - use by independent power producers,

     - competition in sales and delivery,

     - changes in gas commodity prices,

     - Michigan economic conditions,

     - the price of competing energy sources or fuels, and

     - gas consumption per customer.

     In February 2004, we filed an application with the MPSC for a Certificate
of Public Convenience and Necessity to construct a 25-mile gas transmission
pipeline in northern Oakland County. The project is necessary to meet estimated
peak load beginning in the winter of 2005-2006. We started construction of Phase
I of the pipeline in June 2005. Phase I of the project was completed and put in
service in early December 2005. We anticipate completion of Phase II of the
project in 2008.

     In October 2004, we filed an application with the MPSC for a Certificate of
Public Convenience and Necessity to construct a 10.8-mile gas transmission
pipeline in northwestern Wayne County. The project is necessary to meet the
projected capacity demands beginning in the winter of 2007. In August 2005, the
MPSC issued an order approving the application. Construction of the pipeline is
expected to begin in mid-2006.

GAS UTILITY BUSINESS UNCERTAINTIES

     Several gas business trends or uncertainties may affect our future
financial results and financial condition. These trends or uncertainties could
have a material impact on revenues or income from gas operations.

     GAS ENVIRONMENTAL ESTIMATES: We expect to incur investigation and remedial
action costs at a number of sites, including 23 former manufactured gas plant
sites. For additional details, see Note 3, Contingencies, "Consumers' Gas
Utility Contingencies -- Gas Environmental Matters."

     GAS COST RECOVERY: The GCR process is designed to allow us to recover all
of our purchased natural gas costs if incurred under reasonable and prudent
policies and practices. The MPSC reviews these costs for prudency in an annual
reconciliation proceeding. For additional details on gas cost recovery, see Note
3, Contingencies, "Consumers' Gas Utility Rate Matters -- Gas Cost Recovery."

     2001 GAS DEPRECIATION CASE: In October and December 2004, the MPSC issued
Opinions and Orders in our gas depreciation case, which:

     - reaffirmed the previously ordered $34 million reduction in our
       depreciation expense,

     - required us to undertake a study to determine why our plant removal costs
       are in excess of other regulated Michigan natural gas utilities, and

                                      CMS-33
<PAGE>

     - required us to file a study report with the MPSC Staff on or before
       December 31, 2005.

     We filed the study report with the MPSC Staff on December 29, 2005.

     We are also required to file our next gas depreciation case within 90 days
after the MPSC issuance of a final order in the pending case related to ARO
accounting. We expect an MPSC order in the first quarter of 2006.

     If the depreciation case order is issued after the gas general rate case
order, we proposed to incorporate its results into the gas general rates using a
surcharge mechanism.

     2005 GAS RATE CASE: In July 2005, we filed an application with the MPSC
seeking a 12 percent authorized return on equity along with a $132 million
annual increase in our gas delivery and transportation rates. The primary
reasons for the request are recovery of new investments, carrying costs on
natural gas inventory related to higher gas prices, system maintenance, employee
benefits, and low-income assistance. If approved, the request would add
approximately 5 percent to the typical residential customer's average monthly
bill. The increase would also affect commercial and industrial customers.

     As part of this filing, we also requested interim rate relief of $75
million. The MPSC Staff and intervenors filed interim rate relief testimony on
October 31, 2005. In its testimony, the MPSC Staff recommended granting interim
rate relief of $38 million. As of February 2006, the MPSC has not acted on our
interim rate relief request.

     On February 13, 2006, the MPSC Staff recommended granting final rate relief
of $62 million. The MPSC Staff proposed that $17 million of this amount be
contributed to a low income energy efficiency fund. The MPSC Staff also
recommended reducing our return on common equity to 11.15 percent, from our
current 11.4 percent.

     EMERGENCY RULES REGARDING BILLING PRACTICES: On October 18, 2005, the MPSC
issued an order adopting emergency rules for the winter heating period of
November 1, 2005 through March 31, 2006. The rules address billing practices for
retail customers of electric and gas utilities subject to the MPSC's
jurisdiction. The emergency rules are designed to address the increase in
heating costs this winter. They address billing cycles, fees, deposits,
shutoffs, and collection of unpaid bills. The emergency rules will have an
estimated $4 million negative effect on our collections and cash flow in 2006.

ENTERPRISES OUTLOOK

     We plan to continue restructuring our Enterprises business with the
objective of narrowing the focus of our operations to primarily North America,
South America, and the Middle East/North Africa. We will continue to sell
designated assets and investments that are not consistent with this focus.

     Successful businesses, such as Taweelah and Shuweihat in the United Arab
Emirates and Jorf Lasfar in Morocco, continue to make a valuable contribution.
We continually evaluate opportunities to expand our investment in these
businesses. We also evaluate new development opportunities outside of our
current asset base to determine whether they fit within our business strategy.
These and other investment opportunities for our enterprises segment would be
considered for risk, rate of return, and consistency with our business strategy.

     UNCERTAINTIES: The results of operations and the financial position of our
diversified energy businesses may be affected by a number of trends or
uncertainties. Those that could have a material impact on our income, cash
flows, or balance sheet and credit improvement include:

     - our ability to sell or to improve the performance of assets and
       businesses in accordance with our business plan,

     - changes in exchange rates or in local economic or political conditions,
       particularly in Argentina, Venezuela, Brazil, and the Middle East,

     - changes in foreign taxes or laws or in governmental or regulatory
       policies that could reduce significantly the tariffs charged and revenues
       recognized by certain foreign subsidiaries, or increase expenses,

     - imposition of stamp taxes on South American contracts that could increase
       project expenses substantially,

     - impact of any future rate cases, FERC actions, or orders on regulated
       businesses,

                                      CMS-34
<PAGE>

     - impact of ratings downgrades on our liquidity, operating costs, and cost
       of capital,

     - impact of changes in commodity prices and interest rates on certain
       derivative contracts that do not qualify for hedge accounting and must be
       marked to market through earnings,

     - changes in available gas supplies or Argentine government regulations
       that could restrict natural gas exports to our GasAtacama generating
       plant, and

     - impact of indemnity and environmental remediation obligations at Bay
       Harbor.

     SENECA operates an electric utility on Margarita Island, Venezuela under a
Concession Agreement with the Venezuelan Ministry of Energy and Mines, now the
Ministry of Energy and Petroleum (MEP). The Concession Agreement provides for
semi-annual customer tariff adjustments for the effects of inflation and foreign
exchange variations. The last tariff adjustment occurred in December 2003. It
was less than the amount required by the Concession Agreement and no tariff
increases have been granted since then. In July 2003, the MEP approved a fuel
subsidy for SENECA to offset partially the effects of its lower tariff revenues.
The fuel subsidy expired on December 31, 2004. SENECA has sent several letters
to the MEP indicating that the economic circumstances that required the
implementation of the fuel subsidy persist. In the letters, SENECA has informed
the MEP that, unless it objects, SENECA will continue to apply the fuel subsidy
as a credit against a portion of its fuel bills from its fuel supplier,
Deltaven, a governmental body regulated by the MEP. SENECA has not received any
response to the letters from the MEP; therefore, SENECA is taking the fuel
subsidy as a credit against billings from Deltaven. Deltaven has continued to
deliver fuel without interruption. We are informed that the government is
considering whether to grant financial relief to SENECA pursuant to its
Concession Agreement obligations. The outcome is uncertain since all
alternatives are still being explored. If timely financial relief is not
approved, the liquidity of SENECA and the value of our investment in SENECA
would be impacted adversely.

OTHER OUTLOOK

     MCV IMPAIRMENT ISSUES: Due to the impairment of the MCV Facility, the
equity held by the minority interest owners of the MCV Partnership has decreased
significantly. Since we have the controlling financial interest in the MCV
Partnership, we will record 100 percent of future losses incurred at the MCV
Partnership, not just our proportionate share.

     The impairment of the MCV Facility, and any potential future impairment of
the MCV Facility, will likely decrease the amount of equity investment
recognized for ratemaking purposes in future electric and gas rate orders. Lower
equity investment may result in a reduced revenue requirement. However, we
cannot predict the outcome of any future rate cases, which may be lower or
higher based on several factors, including the amount of equity investment and
related risk. For additional information on the impairment of the MCV Facility,
see Note 2, Asset Impairment Charges, Sales, and Discontinued Operations.

     LITIGATION AND REGULATORY INVESTIGATION: We are the subject of an
investigation by the DOJ regarding round-trip trading transactions by CMS MST.
Additionally, we are named as a party in various litigation matters including,
but not limited to, securities class action lawsuits, a class action lawsuit
alleging ERISA violations, and several lawsuits regarding alleged false natural
gas price reporting and price manipulation. For additional details regarding
this investigation and litigation, see Note 3, Contingencies.

     PENSION REFORM: Both branches of Congress passed legislation aimed at
reforming pension plans. The U.S. Senate passed The Pension Security and
Transparency Act in November of 2005 and The House of Representatives passed the
Pension Protection Act of 2005 in December of 2005. At the core of both bills
are changes in the calculation of pension plan funding requirements effective
for plan years beginning in 2007, with interest rate relief extended until then,
and an increase in premiums paid to the Pension Benefit Guaranty Corporation
(PBGC). The latter was addressed through the broader budget reconciliation bill,
which raises the PBGC flat-rate premiums from $19 to $30 per participant per
year beginning in 2006. Although the Senate and House bills are similar, they do
contain a number of technical differences, including differences in the time
period allowed for interest rate and asset smoothing, the interest rate used to
calculate lump sum payments, and the criteria used to determine whether a plan
is "at-risk," which requires higher contribution levels. The Senate and

                                      CMS-35
<PAGE>

the House plan to work out the differences between the two bills in a joint
conference. The timing, however, of a final pension reform bill is unknown. We
are analyzing the impact of this legislation.

IMPLEMENTATION OF NEW ACCOUNTING STANDARDS

     FSP 109-2, ACCOUNTING AND DISCLOSURE GUIDANCE FOR THE FOREIGN EARNINGS
REPATRIATION PROVISION WITHIN THE AMERICAN JOBS CREATION ACT OF 2004: The
American Jobs Creation Act of 2004 created a one-time opportunity to receive a
tax benefit for U.S. corporations that reinvest, in the U.S., dividends received
in a year (2005 for CMS Energy) from controlled foreign corporations. During
2005, we repatriated $377 million of foreign earnings that qualified for the tax
benefit. The net effect of the repatriated earnings were tax benefits of $45
million in 2005 and $21 million in 2004, which were recorded in income from
continuing operations.

     FASB INTERPRETATION NO. 47, ACCOUNTING FOR CONDITIONAL ASSET RETIREMENT
OBLIGATIONS: This Interpretation became effective for us on December 31, 2005.
It clarifies the term "conditional asset retirement obligation" as used in SFAS
No. 143 and specifies that an obligation to perform the asset retirement
activity is unconditional even though uncertainty exists about the timing and
(or) method of settlement. Upon adoption of this Interpretation, we recorded $36
million of conditional asset retirement obligations relating to asbestos
abatement. Implementation did not impact results of operations due to regulatory
accounting. For additional details, see Note 8, Asset Retirement Obligations.

NEW ACCOUNTING STANDARDS NOT YET EFFECTIVE

     SFAS NO. 123(R) AND SAB NO. 107, SHARE-BASED PAYMENT: SFAS No. 123(R)
requires companies to use the fair value of employee stock options and similar
awards at the grant date to value the awards. Companies must expense this amount
over the vesting period of the awards. This Statement also clarifies and expands
SFAS No. 123's guidance in several areas, including measuring fair value,
classifying an award as equity or as a liability, and attributing compensation
cost to reporting periods including the timing of expense recognition for
share-based awards with terms that accelerate vesting upon retirement. As a
result of these clarifications, future compensation costs for share-based awards
with accelerated vesting provisions upon retirement will need to be fully
expensed by the period in which the employee becomes eligible to retire. At
December 31, 2005, unrecognized compensation cost for such share-based awards
held by retirement eligible employees was not material.

     SFAS No. 123(R) was effective for us on January 1, 2006. We elected to
adopt the modified prospective method recognition provisions of this Statement
instead of retrospective restatement. The modified prospective method applies
the recognition provisions to all awards granted or modified after the adoption
date of this Statement. We adopted the fair value method of accounting for
share-based awards effective December 2002. Therefore, SFAS No. 123(R) did not
have a significant impact on our results of operations when it became effective.
For details regarding current accounting for share-based awards, see Note 10,
Executive Incentive Compensation.

     The SEC issued SAB No. 107 to express the views of the staff regarding the
interaction between SFAS No. 123(R) and certain SEC rules and regulations. Also,
the SEC issued SAB No. 107 to provide the staff's views regarding the valuation
of share-based payments, including assumptions such as expected volatility and
expected term. We applied the additional guidance provided by SAB No. 107 upon
implementation of SFAS No. 123(R).

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                                      CMS-37
<PAGE>

                             CMS ENERGY CORPORATION

                    CONSOLIDATED STATEMENTS OF INCOME (LOSS)

<Table>
<Caption>
                                                                 YEARS ENDED DECEMBER 31
                                                                --------------------------
                                                                 2005      2004      2003
                                                                 ----      ----      ----
                                                                       IN MILLIONS
<S>                                                             <C>       <C>       <C>
OPERATING REVENUE...........................................    $6,288    $5,472    $5,513
EARNINGS FROM EQUITY METHOD INVESTEES.......................       125       115       164
OPERATING EXPENSES
  Fuel for electric generation..............................       720       774       405
  Fuel costs mark-to-market at MCV..........................      (200)       19        --
  Purchased and interchange power...........................       546       344       540
  Purchased power -- related parties........................        --        --       455
  Cost of gas sold..........................................     2,297     1,786     1,791
  Other operating expenses..................................     1,105       954       951
  Maintenance...............................................       249       256       226
  Depreciation, depletion and amortization..................       525       431       428
  General taxes.............................................       261       270       191
  Asset impairment charges..................................     1,184       160        95
                                                                ------    ------    ------
                                                                 6,687     4,994     5,082
                                                                ------    ------    ------
OPERATING INCOME (LOSS).....................................      (274)      593       595
OTHER INCOME (DEDUCTIONS)
  Accretion expense.........................................       (18)      (23)      (29)
  Gain (loss) on asset sales, net...........................         6        52        (3)
  Interest and dividends....................................        66        27        28
  Regulatory return on capital expenditures.................         4       113        --
  Foreign currency gains (losses), net......................        (7)       (3)       15
  Other income..............................................        36        27        25
  Other expense.............................................       (30)      (15)      (22)
                                                                ------    ------    ------
                                                                    57       178        14
                                                                ------    ------    ------
FIXED CHARGES
  Interest on long-term debt................................       477       502       473
  Interest on long-term debt -- related parties.............        29        58        58
  Other interest............................................        16        44        59
  Capitalized interest......................................       (38)       25        (9)
  Preferred dividends of subsidiaries.......................         5         5         2
  Preferred securities distributions........................        --        --        10
                                                                ------    ------    ------
                                                                   489       634       593
                                                                ------    ------    ------
INCOME (LOSS) BEFORE MINORITY INTERESTS.....................      (706)      137        16
MINORITY INTERESTS..........................................      (440)       15        --
                                                                ------    ------    ------
INCOME (LOSS) BEFORE INCOME TAXES...........................      (266)      122        16
INCOME TAX EXPENSE (BENEFIT)................................      (168)       (5)       58
                                                                ------    ------    ------
INCOME (LOSS) FROM CONTINUING OPERATIONS....................       (98)      127       (42)
GAIN (LOSS) FROM DISCONTINUED OPERATIONS, NET OF $8 TAX
  EXPENSE IN 2005, $18 TAX EXPENSE IN 2004 AND $50 TAX
  EXPENSE IN 2003...........................................        14        (4)       23
                                                                ------    ------    ------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGES IN
  ACCOUNTING................................................       (84)      123       (19)
CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING, NET OF $1 TAX
  BENEFIT IN 2004 AND $13 TAX BENEFIT IN 2003
  RETIREMENT BENEFITS.......................................        --        (2)       --
  DERIVATIVES...............................................        --        --       (23)
  ASSET RETIREMENT OBLIGATIONS, SFAS NO. 143................        --        --        (1)
                                                                ------    ------    ------
                                                                    --        (2)      (24)
                                                                ------    ------    ------
NET INCOME (LOSS)...........................................       (84)      121       (43)
PREFERRED DIVIDENDS.........................................        10        11         1
                                                                ------    ------    ------
NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS..........    $  (94)   $  110    $  (44)
                                                                ======    ======    ======
</Table>

                                      CMS-38
<PAGE>

<Table>
<Caption>
                                                                 YEARS ENDED DECEMBER 31
                                                                -------------------------
                                                                 2005     2004      2003
                                                                 ----     ----      ----
                                                                 IN MILLIONS, EXCEPT PER
                                                                      SHARE AMOUNTS
<S>                                                             <C>       <C>      <C>
CMS ENERGY
  NET INCOME (LOSS)
     Net Income (Loss) Available to Common Stockholders.....    $  (94)   $ 110    $  (44)
                                                                ======    =====    ======
  BASIC EARNINGS (LOSS) PER AVERAGE COMMON SHARE
     Income (Loss) from Continuing Operations...............    $(0.51)   $0.68    $(0.30)
     Income (Loss) from Discontinued Operations.............      0.07    (0.02)     0.16
     Loss from Changes in Accounting........................        --    (0.01)    (0.16)
                                                                ------    -----    ------
     Net Income (Loss) Attributable to Common Stock.........    $(0.44)   $0.65    $(0.30)
                                                                ======    =====    ======
  DILUTED EARNINGS (LOSS) PER AVERAGE COMMON SHARE
     Income (Loss) from Continuing Operations...............    $(0.51)   $0.67    $(0.30)
     Income (Loss) from Discontinued Operations.............      0.07    (0.02)     0.16
     Loss from Changes in Accounting........................        --    (0.01)    (0.16)
                                                                ------    -----    ------
     Net Income (Loss) Attributable to Common Stock.........    $(0.44)   $0.64    $(0.30)
                                                                ======    =====    ======
  DIVIDENDS DECLARED PER COMMON SHARE.......................    $   --    $  --    $   --
                                                                ------    -----    ------
</Table>

        The accompanying notes are an integral part of these statements.

                                      CMS-39
<PAGE>

                             CMS ENERGY CORPORATION

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<Table>
<Caption>
                                                                   YEARS ENDED DECEMBER 31
                                                                -----------------------------
                                                                 2005       2004       2003
                                                                 ----       ----       ----
                                                                         IN MILLIONS
<S>                                                             <C>        <C>        <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income (loss).........................................    $   (84)   $   121    $   (43)
     Adjustments to reconcile net income (loss) to net cash
      provided by (used in) operating activities
       Depreciation, depletion and amortization (includes
        nuclear decommissioning of $6 per year).............        525        431        428
       Depreciation and amortization of discontinued
        operations..........................................         --         --         34
       Regulatory return on capital expenditures............         (4)      (113)        --
       Minority interest....................................       (440)        15         --
       Fuel costs mark-to-market at MCV.....................       (200)        19         --
       Asset impairment charges.............................      1,184        160         95
       Capital lease and other amortization.................         40         28         25
       Accretion expense....................................         18         23         29
       Bad debt expense.....................................         23         19         28
       Distributions from related parties less than
        earnings............................................        (17)       (88)       (41)
       Loss (gain) on the sale of assets (includes
        discontinued operations)............................        (20)       (50)        49
       Cumulative effect of accounting changes..............         --          2         24
       Pension contribution.................................         --         --       (560)
       Changes in other assets and liabilities:
          Decrease (increase) in accounts receivable and
             accrued revenues...............................       (310)      (144)       200
          Increase in inventories...........................       (245)      (109)      (288)
          Increase (decrease) in accounts payable...........        130         86       (231)
          Increase (decrease) in accrued expenses...........          8         37        (49)
          Increase in MCV gas supplier funds on deposit.....        173         15         --
          Deferred income taxes and investment tax credit...       (168)        91        144
          Decrease (increase) in other current and
             non-current assets.............................        (37)      (117)        10
          Increase (decrease) in other current and
             non-current liabilities........................         70        (28)      (104)
                                                                -------    -------    -------
       Net cash provided by (used in) operating
        activities..........................................    $   646    $   398    $  (250)
                                                                -------    -------    -------
CASH FLOWS FROM INVESTING ACTIVITIES
  Capital expenditures (excludes assets placed under capital
     lease).................................................    $  (593)   $  (525)   $  (535)
  Investments in partnerships and unconsolidated
     subsidiaries...........................................         --        (71)        --
  Cost to retire property...................................        (74)       (73)       (72)
  Restricted cash and restricted short-term investments.....       (151)       145       (163)
  Investments in Electric Restructuring Implementation
     Plan...................................................         --         (7)        (8)
  Investments in nuclear decommissioning trust funds........         (6)        (6)        (6)
  Proceeds from nuclear decommissioning trust funds.........         39         36         34
  Proceeds from short-term investments......................        295      2,267         --
  Purchase of short-term investments........................       (186)    (2,376)        --
  Maturity of MCV restricted investment securities
     held-to-maturity.......................................        318        675         --
  Purchase of MCV restricted investment securities
     held-to-maturity.......................................       (270)      (674)        --
  Proceeds from sale of assets..............................         61        219        939
  Other investing...........................................         26         (2)        14
                                                                -------    -------    -------
       Net cash provided by (used in) investing
        activities..........................................    $  (541)   $  (392)   $   203
                                                                -------    -------    -------
</Table>

                                      CMS-40
<PAGE>

<Table>
<Caption>
                                                                   YEARS ENDED DECEMBER 31
                                                                -----------------------------
                                                                 2005       2004       2003
                                                                 ----       ----       ----
                                                                         IN MILLIONS
<S>                                                             <C>        <C>        <C>
CASH FLOWS FROM FINANCING ACTIVITIES
  Proceeds from notes, bonds, and other long-term debt......    $ 1,385    $ 1,392    $ 2,080
  Issuance of common stock..................................        295        290         --
  Issuance of preferred stock...............................         --         --        272
  Retirement of bonds and other long-term debt..............     (1,509)    (1,631)    (1,656)
  Payment of preferred stock dividends......................        (11)       (11)        (1)
  Payment of capital lease and finance lease obligations....        (29)       (44)       (13)
  Decrease in notes payable.................................         --         --       (470)
  Debt issuance costs, financing fees, and other............        (57)       (39)        17
                                                                -------    -------    -------
     Net cash provided by (used in) financing activities....    $    74    $   (43)   $   229
                                                                -------    -------    -------
EFFECT OF EXCHANGE RATES ON CASH............................         (1)        --         (1)
                                                                -------    -------    -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........    $   178    $   (37)   $   181
CASH AND CASH EQUIVALENTS FROM EFFECT OF REVISED FASB
  INTERPRETATION NO. 46 CONSOLIDATION.......................         --        174         --
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD..............        669        532        351
                                                                -------    -------    -------
CASH AND CASH EQUIVALENTS, END OF PERIOD....................    $   847    $   669    $   532
                                                                =======    =======    =======
</Table>

<Table>
<Caption>
OTHER CASH FLOW ACTIVITIES AND NON-CASH INVESTING AND FINANCING
ACTIVITIES WERE:
<S>                                                                <C>        <C>        <C>
CASH TRANSACTIONS
  Interest paid (net of amounts capitalized).................      $   454    $   601    $   564
  Income taxes paid (net of refunds).........................           (9)        --        (33)
  OPEB cash contribution.....................................           63         63         76
NON-CASH TRANSACTIONS
  Other assets placed under capital lease....................      $    12    $     3    $    19
                                                                   =======    =======    =======
</Table>

        The accompanying notes are an integral part of these statements.

                                      CMS-41
<PAGE>

                             CMS ENERGY CORPORATION

                          CONSOLIDATED BALANCE SHEETS

<Table>
<Caption>
                                                                    DECEMBER 31
                                                                -------------------
                                                                 2005        2004
                                                                 ----        ----
                                                                    IN MILLIONS
<S>                                                             <C>        <C>
ASSETS
PLANT AND PROPERTY (AT COST)
  Electric utility..........................................    $ 8,204    $ 7,967
  Gas utility...............................................      3,151      2,995
  Enterprises...............................................      1,068      3,517
  Other.....................................................         25         28
                                                                -------    -------
                                                                 12,448     14,507
  Less accumulated depreciation, depletion and
     amortization...........................................      5,123      6,135
                                                                -------    -------
                                                                  7,325      8,372
  Construction work-in-progress.............................        520        370
                                                                -------    -------
                                                                  7,845      8,742
                                                                -------    -------
INVESTMENTS
  Enterprises...............................................        712        729
  Other.....................................................         13         23
                                                                -------    -------
                                                                    725        752
                                                                -------    -------
CURRENT ASSETS
  Cash and cash equivalents at cost, which approximates
     market.................................................        847        669
  Restricted cash and restricted short-term investments.....        198         56
  Short-term investments at cost, which approximates
     market.................................................         --        109
  Accounts receivable, notes receivable and accrued revenue,
     less allowances of $31 in 2005 and $38 in 2004.........        824        528
  Accounts receivable and notes receivable -- related
     parties................................................         54         53
  Inventories at average cost
     Gas in underground storage.............................      1,069        856
     Materials and supplies.................................         96         90
     Generating plant fuel stock............................        110         84
  Price risk management assets..............................        113         91
  Regulatory assets -- postretirement benefits..............         19         19
  Derivative instruments....................................        242         96
  Deferred property taxes...................................        160        167
  Prepayments and other.....................................        167        181
                                                                -------    -------
                                                                  3,899      2,999
                                                                -------    -------
NON-CURRENT ASSETS
  Regulatory assets
     Securitized costs......................................        560        604
     Additional minimum pension.............................        399        372
     Postretirement benefits................................        116        139
     Customer Choice Act....................................        222        171
     Other..................................................        484        391
  Price risk management assets..............................        165        214
  Nuclear decommissioning trust funds.......................        555        575
  Goodwill..................................................         27         23
  Notes receivable -- related parties.......................        187        217
  Notes receivable..........................................        187        178
  Other.....................................................        649        495
                                                                -------    -------
                                                                  3,551      3,379
                                                                -------    -------
TOTAL ASSETS................................................    $16,020    $15,872
                                                                =======    =======
</Table>

                                      CMS-42
<PAGE>

<Table>
<Caption>
                                                                    DECEMBER 31
                                                                -------------------
                                                                 2005        2004
                                                                 ----        ----
                                                                    IN MILLIONS
<S>                                                             <C>        <C>
STOCKHOLDERS' INVESTMENT AND LIABILITIES
CAPITALIZATION
  Common stockholders' equity
  Common stock, authorized 350.0 shares; outstanding 220.5
     shares in 2005 and 195.0 shares in 2004................    $     2    $     2
  Other paid-in capital.....................................      4,436      4,140
  Accumulated other comprehensive loss......................       (288)      (336)
  Retained deficit..........................................     (1,828)    (1,734)
                                                                -------    -------
                                                                  2,322      2,072
  Preferred stock of subsidiary.............................         44         44
  Preferred stock...........................................        261        261
  Long-term debt............................................      6,800      6,444
  Long-term debt -- related parties.........................        178        504
  Non-current portion of capital and finance lease
     obligations............................................        308        315
                                                                -------    -------
                                                                  9,913      9,640
                                                                -------    -------
MINORITY INTERESTS..........................................        333        733
                                                                -------    -------
CURRENT LIABILITIES
  Current portion of long-term debt, capital and finance
     leases.................................................        316        296
  Current portion of long-term debt -- related parties......        129        180
  Accounts payable..........................................        511        391
  Accounts payable -- related parties.......................          1          1
  Accrued interest..........................................        145        145
  Accrued taxes.............................................        331        312
  Price risk management liabilities.........................         80         90
  Current portion of gas supply contract obligations........         10         32
  Deferred income taxes.....................................         55         19
  MCV gas supplier funds on deposit.........................        193         20
  Other.....................................................        342        269
                                                                -------    -------
                                                                  2,113      1,755
                                                                -------    -------
NON-CURRENT LIABILITIES
  Regulatory liabilities
     Regulatory liabilities for cost of removal.............      1,120      1,044
     Income taxes, net......................................        455        433
     Other regulatory liabilities...........................        178        173
  Postretirement benefits...................................        382        275
  Deferred income taxes.....................................        297        494
  Deferred investment tax credit............................         67         79
  Asset retirement obligations..............................        496        439
  Price risk management liabilities.........................        161        213
  Gas supply contract obligations...........................         61        176
  Other.....................................................        444        418
                                                                -------    -------
                                                                  3,661      3,744
                                                                -------    -------
     Commitments and Contingencies (Notes 3,4,6,9 and 11)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES..............    $16,020    $15,872
                                                                =======    =======
</Table>

        The accompanying notes are an integral part of these statements.

                                      CMS-43
<PAGE>

                             CMS ENERGY CORPORATION

             CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY

<Table>
<Caption>
                                                              YEARS ENDED DECEMBER 31
                                          ----------------------------------------------------------------
                                           2005       2004       2003       2005        2004        2003
                                           ----       ----       ----       ----        ----        ----
                                          NUMBER OF SHARES IN THOUSANDS              IN MILLIONS
<S>                                       <C>        <C>        <C>        <C>        <C>         <C>
COMMON STOCK
  At beginning and end of period........                                   $     2    $     2     $     2
OTHER PAID-IN CAPITAL
  At beginning of period................  194,997    161,130    144,088      4,140      3,846       3,605
  Common stock repurchased..............      (88)       (43)       (14)        (1)        (1)         --
  Common stock reacquired...............       --       (270)      (217)        --         (5)         (5)
  Common stock issued...................   25,493     34,180     17,273        296        301         234
  Common stock reissued.................       95         --         --          1         --           1
  Issuance cost of preferred stock......       --         --         --         --         (1)         (8)
  Deferred gain.........................       --         --         --         --         --          19
                                          -------    -------    -------    -------    -------     -------
       At end of period.................  220,497    194,997    161,130      4,436      4,140       3,846
                                          -------    -------    -------    -------    -------     -------
ACCUMULATED OTHER COMPREHENSIVE LOSS
  Minimum pension liability
     At beginning of period.............                                       (17)        --        (241)
     Minimum pension liability
       adjustments(a)...................                                        (2)       (17)        241
                                                                           -------    -------     -------
       At end of period.................                                       (19)       (17)         --
                                                                           -------    -------     -------
  Investments
     At beginning of period.............                                         9          8           2
     Unrealized gain on
       investments(a)...................                                        --          1           6
                                                                           -------    -------     -------
       At end of period.................                                         9          9           8
                                                                           -------    -------     -------
  Derivative instruments
     At beginning of period.............                                        (9)        (8)        (31)
     Unrealized gain on derivative
       instruments(a)...................                                        51          5           4
     Reclassification adjustments
       included in net income
       (loss)(a)........................                                        (7)        (6)         19
                                                                           -------    -------     -------
       At end of period.................                                        35         (9)         (8)
                                                                           -------    -------     -------
FOREIGN CURRENCY TRANSLATION
  At beginning of period................                                      (319)      (419)       (458)
  Loy Yang sale.........................                                        --        110          --
  Other foreign currency
     translations(a)....................                                         6        (10)         39
                                                                           -------    -------     -------
       At end of period.................                                      (313)      (319)       (419)
                                                                           -------    -------     -------
          At end of period..............                                      (288)      (336)       (419)
                                                                           -------    -------     -------
RETAINED DEFICIT
  At beginning of period................                                    (1,734)    (1,844)     (1,800)
  Net income (loss)(a)..................                                       (84)       121         (43)
  Preferred stock dividends declared....                                       (10)       (11)         (1)
                                                                           -------    -------     -------
       At end of period.................                                    (1,828)    (1,734)     (1,844)
                                                                           -------    -------     -------
TOTAL COMMON STOCKHOLDERS' EQUITY.......  .......                          $ 2,322    $ 2,072     $ 1,585
                                                                           =======    =======     =======
</Table>

                                      CMS-44
<PAGE>

<Table>
<Caption>
                                                                YEARS ENDED DECEMBER 31
                                                              ---------------------------
                                                               2005      2004      2003
                                                               ----      ----      ----
                                                                      IN MILLIONS
<S>                                                           <C>       <C>       <C>
(a)  DISCLOSURE OF OTHER COMPREHENSIVE INCOME (LOSS):
     Minimum pension liability
       Minimum pension liability adjustments, net of tax
          (benefit) of $(1) in 2005, $(9) in 2004 and $132
          in 2003...........................................  $    (2)  $   (17)  $   241
     Investments
       Unrealized gain on investments, net of tax of $-- in
          2005, $1 in 2004 and $3 in 2003...................       --         1         6
     Derivative instruments
       Unrealized gain on derivative instruments, net of tax
          of $29 in 2005, $12 in 2004 and $-- in 2003.......       51         5         4
       Reclassification adjustments included in net income
          (loss), net of tax (benefit) of $(9) in 2005, $(6)
          in 2004 and $11 in 2003...........................       (7)       (6)       19
     Loy Yang sale..........................................       --       110        --
     Other foreign currency translations....................        6       (10)       39
     Net income (loss)......................................      (84)      121       (43)
                                                              -------   -------   -------
       Total Other Comprehensive Income (Loss)..............  $   (36)  $   204   $   266
                                                              =======   =======   =======
</Table>

        The accompanying notes are an integral part of these statements.

                                      CMS-45
<PAGE>

                      (This page intentionally left blank)

                                      CMS-46
<PAGE>

                             CMS ENERGY CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1: CORPORATE STRUCTURE AND ACCOUNTING POLICIES

     CORPORATE STRUCTURE: CMS Energy is an integrated energy company operating
primarily in Michigan. We are the parent holding company of Consumers and
Enterprises. Consumers is a combination electric and gas utility company serving
Michigan's Lower Peninsula. Enterprises, through various subsidiaries and equity
investments, is engaged in domestic and international diversified energy
businesses including independent power production, electric distribution, and
natural gas transmission, storage and processing. We manage our businesses by
the nature of services each provides and operate principally in three business
segments: electric utility, gas utility, and enterprises.

     PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
CMS Energy, Consumers, Enterprises, and all other entities in which we have a
controlling financial interest or of which we are the primary beneficiary, in
accordance with Revised FASB Interpretation No. 46. We use the equity method of
accounting for investments in companies and partnerships that are not
consolidated, where we have significant influence over operations and financial
policies, but are not the primary beneficiary. We eliminate intercompany
transactions and balances.

     USE OF ESTIMATES: We prepare our consolidated financial statements in
conformity with U.S. generally accepted accounting principles. We are required
to make estimates using assumptions that may affect the reported amounts and
disclosures. Actual results could differ from those estimates.

     We are required to record estimated liabilities in the consolidated
financial statements when it is probable that a loss will be incurred in the
future as a result of a current event, and when an amount can be reasonably
estimated. We have used this accounting principle to record estimated
liabilities as discussed in Note 3, Contingencies.

     REVENUE RECOGNITION POLICY: We recognize revenues from deliveries of
electricity and natural gas, and the transportation, processing, and storage of
natural gas when services are provided. Sales taxes are recorded as liabilities
and are not included in revenues. Revenues on sales of marketed electricity,
natural gas, and other energy products are recognized at delivery.
Mark-to-market changes in the fair values of energy trading contracts that
qualify as derivatives are recognized as revenues in the periods in which the
changes occur.

     ACCOUNTING FOR MISO TRANSACTIONS: CMS ERM accounts for MISO transactions on
a net basis for each of the generating units for which CMS ERM sells power. CMS
ERM allocates other fixed costs associated with MISO settlements back to the
generating units and records billing adjustments when invoices are received.
Consumers accounts for MISO transactions on a net basis for all of its
generating units combined. Consumers records billing adjustments when invoices
are received and also records an expense accrual for future adjustments based on
historical experience.

     ACCRETION EXPENSE: CMS ERM has entered into prepaid sales arrangements to
provide natural gas to various entities over periods of up to 12 years at
predetermined price levels. CMS ERM has established a liability for these
outstanding obligations equal to the discounted present value of the contracts,
and has hedged its exposures under these arrangements. The amounts recorded as
liabilities on our Consolidated Balance Sheets are guaranteed by Enterprises. As
CMS ERM fulfills its obligations under the contracts, it recognizes revenues
upon the delivery of natural gas, records a reduction to the outstanding
obligation, and recognizes accretion expense. In December 2005, CMS ERM
extinguished one of the outstanding obligations for $118 million, which included
a $9 million loss on extinguishment.

     CAPITALIZED INTEREST: We are required to capitalize interest on certain
qualifying assets that are undergoing activities to prepare them for their
intended use. Capitalization of interest for the period is limited to the actual
interest cost that is incurred. Our regulated businesses are permitted to
capitalize an allowance for funds used during construction on regulated
construction projects and to include such amounts in plant in service.

                                      CMS-47
<PAGE>
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     CASH EQUIVALENTS, RESTRICTED CASH, AND RESTRICTED SHORT-TERM
INVESTMENTS: All highly liquid investments with an original maturity of three
months or less are considered cash equivalents.

     At December 31, 2005, our restricted cash and restricted short-term
investments on hand was $198 million. Restricted cash dedicated for repayment of
Securitization bonds is classified as a current asset, as the payments on the
related Securitization bonds occur within one year. Restricted short-term
investments consist of $128 million of U.S. Treasury securities deposited with a
trustee for the purpose of extinguishing the current portion of long-term
debt -- related parties. These investments have original maturity dates of less
than one year and, because of their short-term maturities, carrying amounts
approximate fair value.

     COLLECTIVE BARGAINING AGREEMENTS: At December 31, 2005, approximately 45
percent of Consumers' employees were represented by the Utility Workers of
America Union. The Union represents Consumers' operating, maintenance, and
construction employees and call center employees.

     COST METHOD INVESTMENTS: Our cost method investments totaled $19 million at
December 31, 2005 and $22 million at December 31, 2004. We periodically
reevaluate the fair value of our cost method investments if there are specific
events or changes in circumstances that may have a significant adverse effect on
the fair value of our investments.

     EARNINGS PER SHARE: Basic and diluted earnings per share are based on the
weighted average number of shares of common stock and dilutive potential common
stock outstanding during the period. Potential common stock, for purposes of
determining diluted earnings per share, includes the effects of dilutive stock
options, warrants and convertible securities. The effect on the number of shares
of such potential common stock is computed using the treasury stock method or
the if-converted method, as applicable. Diluted EPS excludes the impact of
antidilutive securities, which are those securities resulting in an increase in
EPS or a decrease in loss per share. For earnings per share computation, see
Note 5, Earnings Per Share.

     FINANCIAL AND DERIVATIVE INSTRUMENTS: We account for investments in debt
and equity securities using SFAS No. 115. Debt and equity securities classified
as available-for-sale are reported at fair value determined from quoted market
prices. Debt and equity securities classified as held-to-maturity are reported
at cost.

     Unrealized gains or losses resulting from changes in fair value of certain
available-for-sale debt and equity securities are reported, net of tax, in
equity as part of accumulated other comprehensive income. Unrealized gains or
losses are excluded from earnings unless the related changes in fair value are
determined to be other than temporary. Unrealized gains or losses on our nuclear
decommissioning investments are reflected as regulatory liabilities on our
Consolidated Balance Sheets. Realized gains or losses would not affect our
earnings or cash flows.

     We account for derivative instruments using SFAS No. 133. Derivatives are
reported on the balance sheet at their fair value. Changes in fair value are
recorded to accumulated other comprehensive income if the derivative qualifies
for cash flow hedge accounting; otherwise, the changes are recorded to earnings.

     For additional details regarding financial and derivative instruments, see
Note 6, Financial and Derivative Instruments.

     GAS INVENTORY: We use the weighted average cost method for valuing working
gas and recoverable cushion gas in underground storage facilities.

     GENERATING PLANT FUEL STOCK INVENTORY: We use the weighted average cost
method for valuing coal inventory and classify these costs as generating plant
fuel stock on our Consolidated Balance Sheets. The MCV Partnership's natural gas
inventory, also included in this category, is stated at the lower of cost or
market and valued using the last-in, first-out (LIFO) method. The amount of
reserve to reduce the MCV Partnership's inventory from the first-in, first-out
(FIFO) basis to the LIFO basis was $15 million at December 31, 2005 and

                                      CMS-48
<PAGE>
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

$10 million at December 31, 2004. Inventory cost determined on a FIFO basis
approximates current replacement cost.

     GOODWILL: Goodwill represents the excess of the purchase price over the
fair value of the net assets of acquired companies. Goodwill is not amortized,
but is tested annually for impairment. There is no goodwill at the electric and
gas utility segments.

     The changes in the carrying amount of goodwill at the Enterprises segment
for the years ended December 31, 2004 and 2005 are included in the following
table:

<Table>
<Caption>
                                                                IN MILLIONS
                                                                -----------
<S>                                                             <C>
Balance at January 1, 2004..................................        $25
  Impairments(a)............................................         (5)
  Currency translation adjustment...........................          3
                                                                    ---
Balance at December 31, 2004................................        $23
  Currency translation adjustment...........................          4
                                                                    ---
Balance at December 31, 2005................................        $27
                                                                    ===
</Table>

-------------------------

(a)  In the fourth quarter of 2004, an impairment charge was recorded to
     recognize a reduction in fair value as a result of the sale of GVK, which
     included a goodwill impairment of $5 million. We closed on the sale of GVK
     in February 2005.

     IMPAIRMENT OF LONG-LIVED ASSETS AND EQUITY METHOD INVESTMENTS: We evaluate
potential impairments of our long-lived assets, other than goodwill, based on
various analyses, including the projection of undiscounted cash flows, whenever
events or changes in circumstances indicate that the carrying amount of the
assets may not be recoverable. If the carrying amount of the asset exceeds its
estimated undiscounted future cash flows, an impairment loss is recognized and
the asset is written down to its estimated fair value.

     We also assess our ability to recover the carrying amounts of our equity
method investments whenever events or changes in circumstances indicate that the
carrying amount of the investments may not be recoverable. This assessment
requires us to determine the fair values of our equity method investments. The
determination of fair value is based on valuation methodologies, including
discounted cash flows and the ability of the investee to sustain an earnings
capacity that justifies the carrying amount of the investment. If the fair value
is less than the carrying value and the decline in value is considered to be
other than temporary, an appropriate write-down is recorded.

     For additional details, see Note 2, Asset Impairment Charges, Sales, and
Discontinued Operations.

     INTERNATIONAL OPERATIONS AND FOREIGN CURRENCY: Our subsidiaries and
affiliates whose functional currency is not the U.S. dollar translate their
assets and liabilities into U.S. dollars at the exchange rates in effect at the
end of the fiscal period. We translate revenue and expense accounts of such
subsidiaries and affiliates into U.S. dollars at the average exchange rates that
prevailed during the period. These foreign currency translation adjustments are
shown in the stockholders' equity section on our Consolidated Balance Sheets.
Exchange rate fluctuations on transactions denominated in a currency other than
the functional currency, except those that are hedged, are included in
determining net income.

     At December 31, 2005, the Foreign Currency Translation component of
stockholders' equity is $313 million, which primarily represents currency losses
in Argentina and Brazil. The net foreign currency loss due to the unfavorable
exchange rate of the Argentine peso using an exchange rate of 3.038 pesos per
U.S. dollar was $265 million. The net foreign currency loss due to the
unfavorable exchange rate of the Brazilian real using an exchange rate of 2.33
reals per U.S. dollar was $51 million.

                                      CMS-49
<PAGE>
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     MAINTENANCE AND DEPRECIATION: We charge property repairs and minor property
replacements to maintenance expense. We also charge planned major maintenance
activities to operating expense unless the cost represents the acquisition of
additional components or the replacement of an existing component. We capitalize
the cost of plant additions and replacements. We depreciate utility property
using straight-line rates approved by the MPSC. The composite depreciation rates
for our properties are:

<Table>
<Caption>
YEARS ENDED DECEMBER 31                                         2005    2004    2003
-----------------------                                         ----    ----    ----
<S>                                                             <C>     <C>     <C>
Electric utility property...................................    3.1%    3.1%     3.1%
Gas utility property........................................    3.6%    3.7%     4.6%
Other property..............................................    7.6%    8.4%     8.1%
</Table>

     NUCLEAR FUEL COST: We amortize nuclear fuel cost to fuel expense based on
the quantity of heat produced for electric generation. For nuclear fuel used
after April 6, 1983, we charge certain disposal costs to nuclear fuel expense,
recover these costs through electric rates, and remit them to the DOE quarterly.
We elected to defer payment for disposal of spent nuclear fuel burned before
April 7, 1983. Our DOE liability is $145 million at December 31, 2005 and $141
million at December 31, 2004. This amount includes interest, which is payable
upon the first delivery of spent nuclear fuel to the DOE. The amount of this
liability, excluding a portion of interest, was recovered through electric
rates. For additional details on disposal of spent nuclear fuel, see Note 3,
Contingencies, "Other Consumers' Electric Utility Contingencies -- Nuclear
Matters."

     OTHER INCOME AND OTHER EXPENSE: The following tables show the components of
Other income and Other expense:

<Table>
<Caption>
YEARS ENDED DECEMBER 31                                         2005    2004    2003
-----------------------                                         ----    ----    ----
                                                                     IN MILLIONS
<S>                                                             <C>     <C>     <C>
Other income
  Interest and dividends -- related parties.................    $ 10    $  6    $   6
  Return on stranded and security costs.....................       6       9       --
  Nitrogen oxide allowance sales............................       2      --       --
  Electric restructuring return.............................       6       6        8
  Investment sale gain......................................      --       3        4
  Reversal of contingent liability..........................       3      --       --
  All other.................................................       9       3        7
                                                                ----    ----    -----
Total other income..........................................    $ 36    $ 27    $  25
                                                                ====    ====    =====
</Table>

<Table>
<Caption>
YEARS ENDED DECEMBER 31                                         2005    2004    2003
-----------------------                                         ----    ----    ----
                                                                     IN MILLIONS
<S>                                                             <C>     <C>     <C>
Other expense
  Loss on SERP investment...................................    $ (2)   $ (3)   $  (2)
  Loss on reacquired and extinguished debt..................     (16)     --       --
  CMS ERM remediation costs.................................      --      --       (6)
  Civic and political expenditures..........................      (2)     (2)      (2)
  All other.................................................     (10)    (10)     (12)
                                                                ----    ----    -----
Total other expense.........................................    $(30)   $(15)   $ (22)
                                                                ====    ====    =====
</Table>

     PROPERTY, PLANT, AND EQUIPMENT: We record property, plant, and equipment at
original cost when placed into service. When regulated assets are retired, or
otherwise disposed of in the ordinary course of business, the original cost is
charged to accumulated depreciation, along with associated cost of removal net
of salvage. Cost of removal collected from our customers, but not spent, is
recorded as a regulatory liability. An allowance for funds used during
construction is capitalized on regulated major construction projects. With
respect to the retirement or

                                      CMS-50
<PAGE>
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

disposal of non-regulated assets, the resulting gains or losses are recognized
in income. For additional details, see Note 8, Asset Retirement Obligations and
Note 12, Property, Plant, and Equipment.

     RECLASSIFICATIONS: Certain prior year amounts have been reclassified for
comparative purposes. These reclassifications did not affect consolidated net
income (loss) for the years presented.

     RELATED-PARTY TRANSACTIONS: We received income from related parties as
follows:

<Table>
<Caption>
TYPE OF INCOME                               RELATED PARTY              2005    2004    2003
--------------                               -------------              ----    ----    ----
                                                                             IN MILLIONS
                                                                        ---------------------
<S>                                 <C>                                 <C>     <C>     <C>
Income from our investments in
  related party trusts(a)           Trust Preferred Securities          $ 1     $ 2     $   2
                                    Companies.......................
Gas sales, storage,
  transportation, and other
  services(b)                       MCV Partnership.................     --      --        17
</Table>

     We recorded expense from related parties as follows:

<Table>
<Caption>
TYPE OF COST                                 RELATED PARTY              2005    2004    2003
------------                                 -------------              ----    ----    ----
                                                                             IN MILLIONS
<S>                                 <C>                                 <C>     <C>     <C>
Interest expense on long-term
  debt(a)                           Trust Preferred Securities          $29     $58     $  58
                                    Companies.......................
Electric generating capacity and
  energy(b)                         MCV Partnership.................     --      --       455
</Table>

-------------------------
(a)  We issued Trust Preferred Securities through several CMS Energy and
     Consumers affiliated companies. At December 31, 2003, we deconsolidated the
     trusts that hold the mandatorily redeemable Trust Preferred Securities. As
     a result of the deconsolidation, we now record on our Consolidated
     Statements of Income (Loss), Interest on Long-term debt -- related parties
     to the trusts holding the Trust Preferred Securities.

(b)  In 2004, we consolidated the MCV Partnership and the FMLP into our
     consolidated financial statements in accordance with Revised FASB
     Interpretation No. 46. For additional details, see Note 16, Consolidation
     of Variable Interest Entities.

     TRADE RECEIVABLES: We record our accounts receivable at fair value.
Accounts deemed uncollectible are charged to operating expense.

     UNAMORTIZED DEBT PREMIUM, DISCOUNT, AND EXPENSE: We capitalize premiums,
discounts, and expenses incurred in connection with the issuance of long-term
debt and amortize those costs over the terms of the debt issues. Any refinancing
costs are charged to expenses as incurred. For the regulated portions of our
businesses, if we refinance debt, we capitalize any remaining unamortized
premiums, discounts, and expenses and amortize them over the terms of the newly
issued debt.

     UTILITY REGULATION: We account for the effects of regulation based on the
regulated utility accounting standard SFAS No. 71. As a result, the actions of
regulators affect when we recognize revenues, expenses, assets, and liabilities.

     We reflect the following regulatory assets and liabilities, which include
both current and non-current amounts, on our Consolidated Balance Sheets. We
expect to recover these costs through rates over periods of up

                                      CMS-51
<PAGE>
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

to 14 years. We recognized an OPEB transition obligation in accordance with SFAS
No. 106 and established a regulatory asset for the amount that we expect to
recover in rates over the next seven years.

<Table>
<Caption>
DECEMBER 31                                                      2005      2004
-----------                                                      ----      ----
                                                                  IN MILLIONS
<S>                                                             <C>       <C>
Securitized costs (Note 4)..................................    $  560    $  604
Postretirement benefits (Note 7)............................       135       158
Additional minimum pension liability (Note 7)...............       399       372
Electric Restructuring Implementation Plan (Note 3).........        74        88
Manufactured gas plant sites (Note 3).......................        62        65
Abandoned Midland project...................................         9        10
Unamortized debt costs......................................        93        71
Asset retirement obligations (Note 8).......................       169        83
Stranded costs (Note 3).....................................        63        63
Customer Choice Act (Note 3)................................       222       171
Other.......................................................        14        11
                                                                ------    ------
Total regulatory assets(a)..................................    $1,800    $1,696
                                                                ======    ======
Cost of removal (Note 8)....................................    $1,120    $1,044
Income taxes, net (Note 9)..................................       455       433
Asset retirement obligations (Note 8).......................       165       168
Other.......................................................        13         5
                                                                ------    ------
Total regulatory liabilities(a).............................    $1,753    $1,650
                                                                ======    ======
</Table>

-------------------------
(a)  At December 31, 2005, we classified $19 million of regulatory assets as
     current regulatory assets and we classified $1.781 billion of regulatory
     assets as non-current regulatory assets. At December 31, 2004, we
     classified $19 million of regulatory assets as current regulatory assets
     and we classified $1.677 billion of regulatory assets as non-current
     regulatory assets. At December 31, 2005 and December 31, 2004, all of our
     regulatory liabilities represented non-current regulatory liabilities.

2: ASSET IMPAIRMENT CHARGES, SALES, AND DISCONTINUED OPERATIONS

ASSET IMPAIRMENT CHARGES

     The following table summarizes our asset impairments:

<Table>
<Caption>
                                                PRETAX    AFTER-TAX    PRETAX    AFTER-TAX    PRETAX    AFTER-TAX
YEARS ENDED DECEMBER 31                          2005       2005        2004       2004        2003       2003
-----------------------                         ------    ---------    ------    ---------    ------    ---------
                                                                           IN MILLIONS
<S>                                             <C>       <C>          <C>       <C>          <C>       <C>
Asset impairments:
  MCV(a)....................................    $1,184      $385        $ --       $ --         $--        $--
  Enterprises:
     Loy Yang(b)............................        --        --         125         81         --         --
     International Energy Distribution(c)...        --        --          --         --         72         53
     GVK(d).................................        --        --          30         20         --         --
     SLAP...................................        --        --           5          3         --         --
     CMS Generation.........................        --        --          --         --         16         11
     Other..................................        --        --          --         --          7          4
                                                ------      ----        ----       ----         --         --
Total asset impairments.....................    $1,184      $385        $160       $104         $95        $68
                                                ======      ====        ====       ====         ==         ==
</Table>

                                      CMS-52
<PAGE>
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

-------------------------
(a)  The MCV Partnership's costs of producing electricity are tied to the price
     of natural gas, but its revenues do not vary with changes in the price of
     natural gas. In 2005, NYMEX forward natural gas price forecasts for the
     years 2005 through 2010 increased substantially. Additionally, other
     independent natural gas long-term forward price forecasting organizations
     indicated their intention to raise their forecasts for the price of natural
     gas generally over the entire long-term forecast horizon beyond 2010. Our
     analysis and assessment of this information suggested that forward natural
     gas prices for the period from 2006 through 2010 could average
     approximately $9 per mcf. Further, this information indicated that natural
     gas prices could average approximately $6.50 per mcf over the long term
     beyond 2010. As a result, in 2005, the MCV Partnership reevaluated the
     economics of operating the MCV Facility and determined that an impairment
     analysis, considering revised forward natural gas price assumptions, was
     required. In its impairment analysis, the MCV Partnership determined the
     fair value of its fixed assets by discounting a set of probability-weighted
     streams of future operating cash flows at a 4.3 percent risk free interest
     rate. The carrying value of the MCV Partnership's fixed assets exceeded the
     estimated fair value, resulting in an impairment charge of $1.159 billion
     to recognize the reduction in fair value of the MCV Facility's fixed
     assets. As a result, our 2005 net income was reduced by $369 million after
     accounting for minority interest and tax effects. After reflecting the
     impairment charge, the MCV Partnership's fixed assets, which are included
     on our Consolidated Balance Sheets and reported under the Enterprises
     business segment, are valued at $224 million at December 31, 2005.

     If natural gas prices remain at present levels or increase, the operations
     of the MCV Facility would be adversely affected, which could result in the
     MCV Partnership failing to meet its obligations under the sale and
     leaseback transactions and other contracts, and could result in an
     impairment of the FMLP. At December 31, 2005, Consumers' investment in the
     FMLP was $235 million.

     Our 49 percent interest in the MCV Partnership is held through Consumers'
     wholly-owned subsidiary, CMS Midland. The severe adverse change in the
     anticipated economics of the MCV Partnership operations discussed within
     this Note also led to our decision to impair certain assets carried on the
     balance sheet of CMS Midland. These assets represented interest capitalized
     during the construction of the MCV Facility, which were being amortized
     over the life of the MCV Facility. In the third quarter of 2005, we
     recorded an impairment charge of $25 million ($16 million, net of tax) to
     reduce the carrying amount of these assets to zero.

     The total of the CMS Midland impairment and the MCV Partnership impairment
     previously discussed is $1.184 billion, before tax, and $385 million net of
     taxes and minority interest.

(b)  In the first quarter of 2004, an impairment charge was recorded to
     recognize the reduction in fair value as a result of the sale of Loy Yang,
     completed in April 2004, which included a cumulative net foreign currency
     translation loss of approximately $110 million.

(c)  In September 2003, we wrote down our investment in CMS Electric and Gas'
     Venezuelan electric distribution utility to reflect fair value. The
     impairment was based on estimates of the utility's future cash flows,
     incorporating certain assumptions about Venezuela's regulatory, political,
     and economic environment.

(d)  In December 2004, we recorded impairment charges to adjust our carrying
     value to fair market value as a result of the planned sale of our
     investment in GVK. We closed on the sale of GVK in February 2005.

ASSET SALES

     Gross cash proceeds received from the sale of assets, including
discontinued operations, totaled $61 million in 2005, $219 million in 2004, and
$939 million in 2003.

                                      CMS-53
<PAGE>
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     For the year ended December 31, 2005, we sold the following assets:

<Table>
<Caption>
                                                                             PRETAX    AFTER-TAX
DATE SOLD    BUSINESS/PROJECT                                                 GAIN       GAIN
---------    ----------------                                                ------    ---------
                                                                                 IN MILLIONS
<S>          <C>                                                             <C>       <C>
February     GVK(a)......................................................     $ 4         $ 3
April        Scudder Latin American Power Fund(b)........................       2           1
April        Gas turbine and auxiliary equipment(c)......................      --          --
                                                                              ---         ---
             Total gain on asset sales...................................     $ 6         $ 4
                                                                              ===         ===
</Table>

-------------------------
(a)  In February 2005, we sold our interest in GVK, a 250 MW gas-fired power
     plant located in South Central India, for $21 million.

(b)  In April 2005, we sold our investment in the Scudder Latin American Power
     Fund and received gross cash proceeds of $23 million.

(c)  In April 2005, we received gross cash proceeds of $15 million for the sale
     of a gas turbine and auxiliary equipment. There was no gain or loss on the
     sale.

     For the year ended December 31, 2004, we sold the following assets:

<Table>
<Caption>
                                                                             PRETAX    AFTER-TAX
DATE SOLD    BUSINESS/PROJECT                                                 GAIN       GAIN
---------    ----------------                                                ------    ---------
                                                                                 IN MILLIONS
<S>          <C>                                                             <C>       <C>
February     Bluewater Pipeline..........................................     $ 1         $ 1
April        Loy Yang....................................................      --          --
May          American Gas Index fund.....................................       1           1
August       Goldfields..................................................      45          29
December     Moapa.......................................................       3           2
Various      Other.......................................................       2           1
                                                                              ---         ---
             Total gain on asset sales...................................     $52         $34
                                                                              ===         ===
</Table>

     For the year ended December 31, 2003, we sold the following assets:

<Table>
<Caption>
                                                                               PRETAX        AFTER-TAX
DATE SOLD    BUSINESS/PROJECT                                                GAIN (LOSS)    GAIN (LOSS)
---------    ----------------                                                -----------    -----------
                                                                                    IN MILLIONS
<S>          <C>                                                             <C>            <C>
January      CMS MST Wholesale Gas contracts.............................        $(6)           $(4)
March        CMS MST Wholesale Power contracts...........................          2              1
June         Guardian....................................................         (4)            (3)
December     CMS Land -- Arcadia.........................................          3              2
Various      Other.......................................................          2              1
                                                                                 ---            ---
             Total loss on asset sales...................................        $(3)           $(3)
                                                                                 ===            ===
</Table>

     The impacts of these sales are included in Gain (loss) on assets sales, net
on our Consolidated Statements of Income (Loss). Although most of our asset
sales program is complete, we still may sell certain remaining businesses or
assets as opportunities arise.

                                      CMS-54
<PAGE>
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DISCONTINUED OPERATIONS

     We have discontinued the following operations:

<Table>
<Caption>
                                                           PRETAX        AFTER-TAX
                                                         GAIN (LOSS)    GAIN (LOSS)
BUSINESS/PROJECT                        DISCONTINUED       ON SALE        ON SALE            STATUS
----------------                        ------------     -----------    -----------          ------
                                                               (IN MILLIONS)
<S>                                    <C>               <C>            <C>            <C>
CMS Viron..........................    June 2002              (14)           (9)       Sold June 2003
Panhandle..........................    December 2002          (39)          (44)       Sold June 2003
CMS Field Services.................    December 2002           (5)           (1)       Sold July 2003
Marysville.........................    June 2003                2             1        Sold November 2003
Parmelia...........................    December 2003           10             6        Sold August 2004
</Table>

     The following amounts are reflected in the Consolidated Statements of
Income (Loss), in the Gain (Loss) From Discontinued Operations line:

<Table>
<Caption>
YEARS ENDED DECEMBER 31                                         2005      2004      2003
-----------------------                                         ----      ----      ----
                                                                      (IN MILLIONS)
<S>                                                             <C>       <C>       <C>
Revenues....................................................    $--       $ 11      $ 504
                                                                ===       ====      =====
Discontinued operations:
  Pretax gain (loss) from discontinued operations...........    $--       $ (1)     $ 115
  Income tax expense........................................     --          1         46
                                                                ---       ----      -----
  Gain (loss) from discontinued operations..................     --         (2)        69
  Pretax gain (loss) from disposal of discontinued
     operations.............................................     22(a)      15        (42)
  Income tax expense........................................      8         17          4
                                                                ---       ----      -----
  Gain (loss) from disposal of discontinued operations......     14         (2)       (46)
                                                                ---       ----      -----
Gain (Loss) From Discontinued Operations....................    $14       $ (4)     $  23
                                                                ===       ====      =====
</Table>

-------------------------

(a)  In December 2005, we received an arbitration award related to a
     discontinued operation. This award resulted in proceeds of $13 million ($9
     million after-tax). Additional adjustments include a reduction of a
     contingent liability and a settlement of a tax contingency.

     The Gain (Loss) From Discontinued Operations includes a reduction in asset
values, a provision for anticipated closing costs, and a portion of CMS Energy's
interest expense. Interest expense has been allocated based on a ratio of the
expected proceeds for the asset to be sold divided by CMS Energy's total
capitalization of each discontinued operation multiplied by CMS Energy's
interest expense. There was no interest expense allocated to discontinued
operations in 2005, less than $1 million for 2004, and $22 million for 2003.

3: CONTINGENCIES

     SEC AND OTHER INVESTIGATIONS: As a result of round-trip trading
transactions by CMS MST, CMS Energy's Board of Directors established a Special
Committee to investigate matters surrounding the transactions and retained
outside counsel to assist in the investigation. The Special Committee completed
its investigation and reported its findings to the Board of Directors in October
2002. The Special Committee concluded, based on an extensive investigation, that
the round-trip trades were undertaken to raise CMS MST's profile as an energy
marketer with the goal of enhancing its ability to promote its services to new
customers. The Special Committee found no effort to manipulate the price of CMS
Energy Common Stock or affect energy prices. The Special Committee also made
recommendations designed to prevent any recurrence of this practice. Previously,
CMS Energy terminated its speculative trading business and revised its risk
management policy. The Board of Directors adopted, and CMS Energy implemented,
the recommendations of the Special Committee.

                                      CMS-55
<PAGE>
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     CMS Energy is cooperating with an investigation by the DOJ concerning
round-trip trading, which the DOJ commenced in May 2002. CMS Energy is unable to
predict the outcome of this matter and what effect, if any, this investigation
will have on its business. In March 2004, the SEC approved a cease-and-desist
order settling an administrative action against CMS Energy related to round-trip
trading. The order did not assess a fine and CMS Energy neither admitted nor
denied the order's findings. The settlement resolved the SEC investigation
involving CMS Energy and CMS MST. Also in March 2004, the SEC filed an action
against three former employees related to round-trip trading by CMS MST. One of
the individuals has settled with the SEC. CMS Energy is currently advancing
legal defense costs for the remaining two individuals, in accordance with
existing indemnification policies.

     SECURITIES CLASS ACTION LAWSUITS: Beginning on May 17, 2002, a number of
complaints were filed against CMS Energy, Consumers, and certain officers and
directors of CMS Energy and its affiliates, including but not limited to
Consumers which, while established, operated and regulated as a separate legal
entity and publicly traded company, shares a parallel Board of Directors with
CMS Energy. The complaints were filed as purported class actions in the United
States District Court for the Eastern District of Michigan, by shareholders who
allege that they purchased CMS Energy's securities during a purported class
period running from May 2000 through March 2003. The cases were consolidated
into a single lawsuit. The consolidated lawsuit generally seeks unspecified
damages based on allegations that the defendants violated United States
securities laws and regulations by making allegedly false and misleading
statements about CMS Energy's business and financial condition, particularly
with respect to revenues and expenses recorded in connection with round-trip
trading by CMS MST. In January 2005, a motion was granted, dismissing Consumers
and three of the individual defendants, but the court denied the motions to
dismiss for CMS Energy and the 13 remaining individual defendants. Plaintiffs
filed a motion for class certification on April 15, 2005 and an amended motion
for class certification on June 20, 2005. The hearing on this motion is
scheduled for February 28, 2006. On September 20, 2005, CMS Energy filed a
motion for judgment on the pleadings, based on the Dura Pharmaceuticals decision
issued by the United States Supreme Court. Plaintiffs filed their response on
October 25, 2005, along with a so-called "cross-motion for partial summary
judgment" seeking a determination that CMS Energy is liable for all damages
proximately caused by its "culpable conduct." On November 29, 2005, the judge
issued a decision denying both CMS Energy's motion for judgment on the pleadings
and plaintiffs' cross-motion for partial summary judgment. CMS Energy and the
individual defendants will defend themselves vigorously in this litigation but
cannot predict its outcome.

     ERISA LAWSUITS: CMS Energy is a named defendant, along with Consumers, CMS
MST, and certain named and unnamed officers and directors, in two lawsuits
brought as purported class actions on behalf of participants and beneficiaries
of the CMS Employees' Savings and Incentive Plan (the Plan). The two cases,
filed in July 2002 in United States District Court for the Eastern District of
Michigan, were consolidated by the trial judge and an amended consolidated
complaint was filed. Plaintiffs allege breaches of fiduciary duties under ERISA
and seek restitution on behalf of the Plan with respect to a decline in value of
the shares of CMS Energy Common Stock held in the Plan. Plaintiffs also seek
other equitable relief and legal fees. The judge has conditionally granted
plaintiffs' motion for class certification. A trial date has not been set, but
is expected to be no earlier than mid-2006 in the absence of an intervening
settlement of the lawsuits. Settlement negotiations among counsel for the
parties and CMS Energy's fiduciary insurance carrier are ongoing. In the absence
of such a settlement, CMS Energy and Consumers will defend themselves vigorously
in this litigation but cannot predict its outcome.

     GAS INDEX PRICE REPORTING INVESTIGATION: CMS Energy has notified
appropriate regulatory and governmental agencies that some employees at CMS MST
and CMS Field Services appeared to have provided inaccurate information
regarding natural gas trades to various energy industry publications which
compile and report index prices. CMS Energy is cooperating with an ongoing
investigation by the DOJ regarding this matter. CMS Energy is unable to predict
the outcome of the DOJ investigation and what effect, if any, the investigation
will have on its business. The CFTC filed a civil injunctive action against two
former CMS Field Services

                                      CMS-56
<PAGE>
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

employees in Oklahoma federal district court on February 1, 2005. The action
alleges the two engaged in reporting false natural gas trade information, and
the action seeks to enjoin such acts, compel compliance with the Commodities
Exchange Act, and impose monetary penalties. CMS Energy is currently advancing
legal defense costs to the two individuals in accordance with existing
indemnification policies.

     BAY HARBOR: As part of the development of Bay Harbor by certain
subsidiaries of CMS Energy, which went forward under an agreement with the MDEQ,
a third party constructed a golf course over several abandoned cement kiln dust
(CKD) piles left over from the former cement plant operation on the Bay Harbor
site. Pursuant to the agreement with the MDEQ, CMS Energy constructed a water
collection system to recover seep water from one of the CKD piles. In 2002, CMS
Energy sold its interest in Bay Harbor, but retained its obligations under
previous environmental indemnifications entered into at the inception of the
project.

     In September 2004, the MDEQ issued a notice of noncompliance (NON), after
finding high-pH seep water in Lake Michigan adjacent to the property. The MDEQ
also found higher than acceptable levels of heavy metals, including mercury, in
the seep water.

     In February 2005, the EPA executed an Administrative Order on Consent (AOC)
to address problems at Bay Harbor, upon the consent of CMS Land Company, a
subsidiary of Enterprises and CMS Capital, LLC, a subsidiary of CMS Energy.
Under the AOC, CMS Land Company and CMS Capital, LLC are generally obligated,
among other things, to: (i) engage in measures to restrict access to seep areas,
install methods to interrupt the flow of seep water to Lake Michigan, and take
other measures as may be required by the EPA under an approved "removal action
work plan," (ii) investigate and study the extent of hazardous substances at the
site, evaluate alternatives to address a long-term remedy, and issue a report of
the investigation and study; and (iii) within 120 days after EPA approval of the
investigation report, enter into an enforceable agreement with the MDEQ to
address a long-term remedy under certain criteria set forth in the AOC. The EPA
approved a final removal action work plan in September 2005.

     The EPA-approved removal action work plan provides for fencing of affected
beachfront areas and installing an underground leachate collection system, among
other elements. Shoreline areas, where the leachate collection system is
installed, are routinely monitored for effectiveness. To date, the collection
system has proven to be effective. The EPA's approvals also specify that a
backup "containment and isolation system," involving dams or barriers in the
lake, could be required in certain areas, if the collection system is
ineffective. In addition, there are indications that CKD may be located on the
beach at the west end of the collection system installation. As a result,
construction in the affected area has been halted pending further investigation.
CMS Energy has worked out a schedule with the EPA to perform further
investigation of these conditions and will deliver a conceptual design to the
EPA for a remediation system. CMS Energy is presently engaged in negotiations
with the EPA and the MDEQ concerning potential interim remediation activities
for the Eastern CKD pile, which may include a carbon dioxide injection system to
neutralize high-pH materials and/or a collection system or systems.

     Several parties have issued demand letters to CMS Energy claiming breach of
the indemnification provisions, making requests for payment of their expenses
related to the NON, and/or claiming damages to property or personal injury with
regard to the matter. Several landowners have threatened litigation in the event
their demands are not met and owners of one parcel have filed a lawsuit in Emmet
County Circuit Court against CMS Energy and several of its subsidiaries, as well
as Bay Harbor Company LLC and David Johnson, one of the developers at Bay
Harbor. CMS Energy responded to the indemnification claims by stating that it
had not breached its indemnity obligations, it will comply with the indemnities,
it has restarted the seep water collection facility and it has responded to the
NON. CMS Energy has entered into various access, purchase and settlement
agreements with several of the affected landowners at Bay Harbor and continues
negotiations with other landowners for access as necessary to implement
remediation measures. CMS Energy will defend vigorously any property damage and
personal injury claims or lawsuits.

                                      CMS-57
<PAGE>
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     CMS Energy originally recorded a liability for its obligations associated
with this matter in the amount of $45 million in the fourth quarter of 2004.
Under the AOC, CMS Land Company is presently conducting a remedial investigation
of the site, which includes the gathering and analysis of data to be utilized in
arriving at a permanent fix. Based on the evaluation of recent construction
events and site-related data, CMS Energy has increased its liability for its
obligations to $85 million and accordingly, increased the reserve by $40
million. An adverse outcome of this matter, depending on the size of any
indemnification obligation or liability under environmental laws, could have a
potentially significant adverse effect on CMS Energy's financial condition and
liquidity and could negatively impact CMS Energy's financial results. CMS Energy
cannot predict the ultimate cost or outcome of this matter.

CONSUMERS' ELECTRIC UTILITY CONTINGENCIES

     ELECTRIC ENVIRONMENTAL MATTERS: Our operations are subject to environmental
laws and regulations. Costs to operate our facilities in compliance with these
laws and regulations generally have been recovered in customer rates.

     Clean Air: Compliance with the federal Clean Air Act and resulting
regulations has been, and will continue to be, a significant focus for us. The
Nitrogen Oxide State Implementation Plan requires significant reductions in
nitrogen oxide emissions. To comply with the regulations, we expect to incur
capital expenditures totaling $815 million. The key assumptions in the capital
expenditure estimate include:

     - construction commodity prices, especially construction material and
       labor,

     - project completion schedules,

     - cost escalation factor used to estimate future years' costs, and

     - allowance for funds used during construction (AFUDC) rate.

     Our current capital cost estimates include an escalation rate of 2.6
percent and an AFUDC capitalization rate of 8.3 percent. As of December 2005, we
had incurred $605 million in capital expenditures to comply with the federal
Clean Air Act and resulting regulations and anticipate that the remaining $210
million of capital expenditures will be made in 2006 through 2011. These
expenditures include installing selective catalytic control reduction technology
at four of our coal-fired electric plants. In addition to modifying coal-fired
electric plants, our compliance plan includes the use of nitrogen oxide emission
allowances until all of the control equipment is operational in 2011. The
nitrogen oxide emission allowance annual expense is projected to be $10 million
per year, which we expect to recover from our customers. The projected annual
expense is based on market price forecasts and forecasts of regulatory
provisions, known as progressive flow control, that restrict the usage in any
given year of allowances banked from previous years. The allowances and their
cost are accounted for as inventory. The allowance inventory is expensed at the
rolling average cost as the coal-fired electric generating units emit nitrogen
oxide. The expense is recovered from our customers through the PSCR process.

     The EPA recently adopted a Clean Air Interstate Rule that requires
additional coal-fired electric plant emission controls for nitrogen oxides and
sulfur dioxide. The rule involves a two-phase program to reduce emissions of
sulfur dioxide by 71 percent and nitrogen oxides by 63 percent by 2015. The
final rule will require that we run our selective catalytic control technology
units year round beginning in 2009 and may require that we purchase additional
nitrogen oxide allowances beginning in 2009.

     In addition to the selective catalytic control technology installed to meet
the nitrogen oxide standards, our current plan includes installation of flue gas
desulfurization scrubbers. The scrubbers are to be installed by 2014 to meet the
Phase I reduction requirements of the Clean Air Interstate Rule, at costs
similar to those to comply with the nitrogen oxide standards. We currently have
a surplus of sulfur dioxide allowances, which were granted by the EPA and are
accounted for as inventory. In January 2006, we sold some of our excess sulfur
dioxide allowances for $61 million and recognized the proceeds as a regulatory
liability.

                                      CMS-58
<PAGE>
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     In May 2005, the EPA issued the Clean Air Mercury Rule, which requires
initial reductions of mercury emissions from coal-fired electric power plants by
2010 and further reductions by 2018. While the industry has not reached a
consensus on the technical methods for curtailing mercury emissions, our capital
and operating costs for mercury emissions reductions are expected to be
significantly less than what was required for selective catalytic reduction
technology used for nitrogen oxide compliance.

     In August 2005, the MDEQ filed a Motion to Intervene in a court challenge
to certain aspects of EPA's Clean Air Mercury Rule, asserting that the rule is
inadequate. The MDEQ has not indicated the direction that it will pursue to meet
or exceed the EPA requirements through state rulemaking. We are actively
participating in dialog with the MDEQ regarding potential paths for controlling
mercury emissions and meeting the EPA requirements. In October 2005, the EPA
announced it would reconsider certain aspects of the Clean Air Mercury Rule. We
cannot predict the outcome of this proceeding.

     The EPA has alleged that some utilities have incorrectly classified plant
modifications as "routine maintenance" rather than seeking modification permits
from the EPA. We have received and responded to information requests from the
EPA on this subject. We believe that we have properly interpreted the
requirements of "routine maintenance." If our interpretation is found to be
incorrect, we may be required to install additional pollution controls at some
or all of our coal-fired electric plants and potentially pay fines.
Additionally, the viability of certain plants remaining in operation could be
called into question.

     Cleanup and Solid Waste: Under the Michigan Natural Resources and
Environmental Protection Act, we expect that we will ultimately incur
investigation and remedial action costs at a number of sites. We believe that
these costs will be recoverable in rates under current ratemaking policies.

     We are a potentially responsible party at several contaminated sites
administered under Superfund. Superfund liability is joint and several, meaning
that many other creditworthy parties with substantial assets are potentially
responsible with respect to the individual sites. Based on our experience, we
estimate that our share of the total liability for the known Superfund sites
will be between $2 million and $10 million. At December 31, 2005, we have
recorded a liability for the minimum amount of our estimated Superfund
liability.

     In October 1998, during routine maintenance activities, we identified PCB
as a component in certain paint, grout, and sealant materials at Ludington. We
removed and replaced part of the PCB material. We have proposed a plan to deal
with the remaining materials and are awaiting a response from the EPA.

     MCV Environmental Issue: On July 12, 2004, the MDEQ, Air Control Division,
issued the MCV Partnership a Letter of Violation asserting that the MCV Facility
violated its Air Use Permit to Install (PTI) by exceeding the carbon monoxide
emission limit on the Unit 14 duct burner and failing to maintain certain
records in the required format. The MCV Partnership has declared five of the six
duct burners in the MCV Facility as unavailable for operational use (which
reduces the generation capability of the MCV Facility by approximately 100 MW)
and took other corrective action to address the MDEQ's assertions. The one
available duct burner was tested in April 2005 and its emissions met permitted
levels due to the configuration of that particular unit. The MCV Partnership
disagrees with certain of the MDEQ's assertions. The MCV Partnership filed a
response in July 2004 to address the Letter of Violation. On December 13, 2004,
the MDEQ informed the MCV Partnership that it was pursuing an escalated
enforcement action against the MCV Partnership regarding the alleged violations
of the MCV Facility's PTI. The MDEQ also stated that the alleged violations are
deemed federally significant and, as such, placed the MCV Partnership on the
EPA's High Priority Violators List (HPVL). The MDEQ and the MCV Partnership are
pursuing voluntary settlement of this matter, which will satisfy state and
federal requirements and remove the MCV Partnership from the HPVL. Any such
settlement may involve a fine, but at this time, the MDEQ has not stated what,
if any, fine they will seek to impose. At this time, the MCV Partnership
management cannot predict the financial impact or outcome of this issue.

     On July 13, 2004, the MDEQ, Water Division, issued the MCV Facility a
Notice Letter asserting the MCV Facility violated its National Pollutant
Discharge Elimination System (NPDES) Permit by discharging heated

                                      CMS-59
<PAGE>
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

process wastewater into the storm water system, failing to document inspections,
and other minor infractions (alleged NPDES violations). In August 2004, the MCV
Partnership filed a response to the MDEQ letter covering the remediation for
each of the MDEQ's alleged violations. On October 17, 2005, the MDEQ, Water
Bureau, issued the MCV Partnership a Compliance Inspection report, which listed
several minor violations and concerns that needed to be addressed by the MCV
Facility. This report was issued in connection with an inspection of the MCV
Facility in September 2005, which was conducted for compliance and review of the
Storm Water Pollution Prevention Plans (SWPPP). The MCV Partnership submitted
its updated SWPPP on December 1, 2005. The MCV Partnership management believes
it has resolved all issues associated with the Notice Letter and Compliance
Inspection and does not expect any further MDEQ actions on these matters.

     ALLOCATION OF BILLING COSTS: In February 2006, the MPSC issued an order
which determined that Consumers violated the MPSC code of conduct by including a
bill insert advertising an unregulated service. The MPSC issued a penalty of
$45,000 and stated that any subsidy for the use of Consumers' billing system
arising from past code of conduct violations will be accounted for in our next
electric rate case. We cannot predict the outcome or the impact on any future
electric rate case.

     LITIGATION: In October 2003, a group of eight PURPA qualifying facilities
(the plaintiffs), which sell power to us, filed a lawsuit in Ingham County
Circuit Court. The lawsuit alleged that we incorrectly calculated the energy
charge payments made pursuant to power purchase agreements with qualifying
facilities. In February 2004, the Ingham County Circuit Court judge deferred to
the primary jurisdiction of the MPSC, dismissing the circuit court case without
prejudice. In February 2005, the MPSC issued an order in the 2004 PSCR plan case
concluding that we have been correctly administering the energy charge
calculation methodology. The plaintiffs have appealed the MPSC order to the
Michigan Court of Appeals. The plaintiffs also filed suit in the United States
Court for the Western District of Michigan, which the judge subsequently
dismissed. The plaintiffs have appealed the dismissal to the United States Court
of Appeals. We cannot predict the outcome of these appeals.

CONSUMERS' ELECTRIC UTILITY RESTRUCTURING MATTERS

     ELECTRIC ROA: The Customer Choice Act allows all of our electric customers
to buy electric generation service from us or from an alternative electric
supplier. At December 31, 2005, alternative electric suppliers were providing
552 MW of generation service to ROA customers. This amount represents a decrease
of 40 percent compared to December 31, 2004, and is 7 percent of our total
distribution load. It is difficult to predict future ROA customer trends.

     STRANDED COSTS: Prior MPSC orders adopted a mechanism pursuant to the
Customer Choice Act to provide recovery of Stranded Costs that occur when
customers leave our system to purchase electricity from alternative suppliers.
In November 2005, we filed an application with the MPSC related to the
determination of 2004 Stranded Costs. Applying the Stranded Cost methodology
used in prior MPSC orders, we concluded that we experienced zero Stranded Costs
in 2004.

CONSUMERS' ELECTRIC UTILITY RATE MATTERS

     POWER SUPPLY COSTS: To reduce the risk of high electric prices during peak
demand periods and to achieve our reserve margin target, we employ a strategy of
purchasing electric capacity and energy contracts for the physical delivery of
electricity primarily in the summer months and to a lesser degree in the winter
months. We have purchased capacity and energy contracts covering partially the
estimated reserve margin requirements for 2006 through 2010. As a result, we
have recognized an asset of $6 million for unexpired capacity and energy
contracts at December 31, 2005. The total premium costs of electric capacity and
energy contracts for 2005 were approximately $8 million.

                                      CMS-60
<PAGE>
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     PSCR: The PSCR process allows recovery of reasonable and prudent power
supply costs. Revenues from the PSCR charges are subject to reconciliation after
actual costs are reviewed for reasonableness and prudence. In March 2005, we
submitted our 2004 PSCR reconciliation filing to the MPSC.

     In September 2005, we submitted our 2006 PSCR plan filing to the MPSC. In
November 2005, we submitted an amended 2006 PSCR plan to the MPSC to include
higher estimates for certain transmission and coal supply costs. In December
2005, the MPSC issued an order that temporarily excludes a portion of the
increased costs from our PSCR charge. The order also includes a one mill per kWh
reduction in the PSCR charge. We implemented this PSCR charge in January 2006.
If the temporary order remains in effect for the remainder of 2006, it would
result in a delay in the recovery of $87 million related to these excluded power
supply costs. We expect to recover fully these costs through the PSCR process.
To the extent that we incur and are unable to collect these costs in a timely
manner, our cash flows from electric utility operations will be affected
negatively. We are seeking full recovery of filed 2006 costs in 2006 as part of
this proceeding. We cannot predict the outcome of these PSCR proceedings.

OTHER CONSUMERS' ELECTRIC UTILITY CONTINGENCIES

     THE MIDLAND COGENERATION VENTURE: The MCV Partnership, which leases and
operates the MCV Facility, contracted to sell electricity to Consumers for a
35-year period beginning in 1990. We hold a 49 percent partnership interest in
the MCV Partnership, and a 35 percent lessor interest in the MCV Facility. In
2004, we consolidated the MCV Partnership and the FMLP into our consolidated
financial statements in accordance with Revised FASB Interpretation No. 46. For
additional details, see Note 16, Consolidation of Variable Interest Entities.

     Under the MCV PPA, variable energy payments to the MCV Partnership are
based on the cost of coal burned at our coal plants and our operation and
maintenance expenses. However, the MCV Partnership's costs of producing
electricity are tied to the cost of natural gas. Natural gas prices have
increased substantially in recent years and throughout 2005. In 2005, the MCV
Partnership reevaluated the economics of operating the MCV Facility and recorded
an impairment charge. If natural gas prices remain at present levels or
increase, the operations of the MCV Facility would be adversely affected and
could result in the MCV Partnership failing to meet its obligations under the
sale and leaseback transactions and other contracts. For additional details on
the impairment of the MCV Facility, see Note 2, Asset Impairment Charges, Sales,
and Discontinued Operations. We are evaluating various alternatives in order to
develop a new long-term strategy with respect to the MCV Facility.

     Further, the cost that we incur under the MCV PPA exceeds the recovery
amount allowed by the MPSC. Underrecoveries of capacity and fixed energy
payments totaled $59 million in 2005, and were expensed directly to income. We
estimate underrecoveries of $55 million in 2006 and $39 million in 2007.
However, Consumers' direct savings from the RCP, after allocating a portion to
customers, are used to offset our capacity and fixed energy underrecoveries
expense. After September 15, 2007, we expect to claim relief under the
regulatory out provision in the MCV PPA, thereby limiting our capacity and fixed
energy payments to the MCV Partnership to the amounts that we collect from our
customers. The MCV Partnership has indicated that it may take issue with our
exercise of the regulatory out clause after September 15, 2007. We believe that
the clause is valid and fully effective, but cannot assure that it will prevail
in the event of a dispute. If we are successful in exercising the regulatory out
clause, the MCV Partnership may have the right to terminate the MCV PPA. The
MPSC's future actions on the capacity and fixed energy payments recoverable from
customers subsequent to September 15, 2007 may affect negatively the financial
performance of the MCV Partnership.

     In January 2005, the MPSC issued an order approving the RCP, with
modifications. The RCP allows us to recover the same amount of capacity and
fixed energy charges from customers as approved in prior MPSC orders. However,
we are able to dispatch the MCV Facility on the basis of natural gas market
prices, which reduces the MCV Facility's annual production of electricity and,
as a result, reduces the MCV Facility's consumption of

                                      CMS-61
<PAGE>
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

natural gas by an estimated 30 to 40 bcf annually. This decrease in the quantity
of high-priced natural gas consumed by the MCV Facility will benefit our
ownership interest in the MCV Partnership.

     The MCV Facility fuel cost savings are first used to offset fully the cost
of replacement power. Second, $5 million annually, funded jointly by Consumers
and the MCV Partnership, is contributed to our RRP. Remaining savings are split
between the MCV Partnership and Consumers. Consumers shared 50 percent of its
direct savings in 2005, and will share 70 percent of its direct savings in 2006
and beyond. Since the MPSC has excluded these underrecoveries from the rate
making process, we anticipate that our savings from the RCP will not affect our
return on equity used in our base rate filings.

     In January 2005, we implemented the RCP. The underlying agreement for the
RCP between Consumers and the MCV Partnership extends through the term of the
MCV PPA. However, either party may terminate that agreement under certain
conditions. In February 2005, a group of intervenors in the RCP case filed for
rehearing of the MPSC order approving the RCP. The Attorney General also filed
an appeal with the Michigan Court of Appeals. We cannot predict the outcome of
these matters.

     MCV PARTNERSHIP PROPERTY TAXES: In January 2004, the Michigan Tax Tribunal
issued its decision in the MCV Partnership's tax appeal against the City of
Midland for tax years 1997 through 2000. The City of Midland appealed the
decision to the Michigan Court of Appeals, and the MCV Partnership filed a
cross-appeal at the Michigan Court of Appeals. The MCV Partnership also has a
pending case with the Michigan Tax Tribunal for tax years 2001 through 2005. The
MCV Partnership estimates that the 1997 through 2005 tax year cases will result
in a refund to the MCV Partnership of approximately $83 million, inclusive of
interest, if the decision of the Michigan Tax Tribunal is upheld. In February
2006, the Michigan Court of Appeals primarily affirmed the Michigan Tax Tribunal
decision, but remanded the case back to the Michigan Tax Tribunal to clarify
certain aspects of the Tax Tribunal decision. The remanded proceedings may
result in the determination of a greater refund to the MCV Partnership. The MCV
Partnership cannot predict the outcome of these proceedings; therefore, this
anticipated refund has not been recognized in earnings.

     NUCLEAR PLANT DECOMMISSIONING: Decommissioning funding practices approved
by the MPSC require us to file a report on the adequacy of funds for
decommissioning at three-year intervals. We prepared and filed updated cost
estimates for Big Rock and Palisades on March 31, 2004. Excluding additional
costs for spent nuclear fuel storage, due to the DOE's failure to accept this
spent nuclear fuel on schedule, these reports show a decommissioning cost of
$361 million for Big Rock and $868 million for Palisades. Since Big Rock is
currently in the process of decommissioning, this estimated cost includes
historical expenditures in nominal dollars and future costs in 2003 dollars,
with all Palisades costs given in 2003 dollars. Recently updated cost
projections for Big Rock indicate an anticipated decommissioning cost of $395
million as of the end of 2005.

                                      CMS-62
<PAGE>
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     BIG ROCK: In December 2000, funding of the Big Rock trust fund stopped
because the MPSC-authorized decommissioning surcharge collection period expired.
Excluding the additional nuclear fuel storage costs due to the DOE's failure to
accept spent fuel on schedule, we are currently projecting that the level of
funds provided by the trust for Big Rock will fall short of the amount needed to
complete the decommissioning by $57 million. At this time, we plan to provide
the additional amounts needed from our corporate funds and, subsequent to the
completion in 2007 of radiological decommissioning work, seek recovery of such
expenditures from some alternative source. We cannot assume that such efforts
will be successful. The following table shows our Big Rock decommissioning
activities:

<Table>
<Caption>
                                                                YEAR-TO-DATE       CUMULATIVE
                                                              DECEMBER 31, 2005   TOTAL-TO-DATE
                                                              -----------------   -------------
                                                                        (IN MILLIONS)
<S>                                                           <C>                 <C>
Decommissioning expenditures(a).............................         $47              $345
Withdrawals from trust funds................................          39               318
</Table>

-------------------------

(a)  Includes site restoration expenditures.

     These activities had no material impact on net income. At December 31,
2005, we have an investment in nuclear decommissioning trust funds of $10
million for Big Rock. In addition, at December 31, 2005, we have charged $9
million to our FERC jurisdictional depreciation reserve for the decommissioning
of Big Rock.

     PALISADES: Excluding additional nuclear fuel storage costs due to the DOE's
failure to accept spent fuel on schedule, we concluded, based on the costs
estimates filed in March 2004, that the existing surcharge for Palisades needed
to be increased to $25 million annually, beginning January 1, 2006, and
continuing through 2011, our current license expiration date. In June 2004, we
filed an application with the MPSC seeking approval to increase the surcharge
for recovery of decommissioning costs related to Palisades beginning in 2006. In
January 2005, we filed a settlement agreement with the MPSC that was agreed to
by four of the six parties involved in the proceeding. The settlement agreement
provides for the continuation of the existing $6 million annual decommissioning
surcharge through 2011 and for the next periodic review to be filed in March
2007. In September 2005, the MPSC approved the contested settlement. Amounts
collected from electric retail customers and deposited in trusts, including
trust earnings, are credited to a regulatory liability.

     At December 31, 2005, we have an investment in the MPSC nuclear
decommissioning trust funds of $534 million for Palisades. In addition, at
December 31, 2005, we have a FERC decommissioning trust fund with a balance of
$11 million. For additional details on decommissioning costs accounted for as
asset retirement obligations, see Note 8, Asset Retirement Obligations.

     In March 2005, the NMC, which operates the Palisades plant, applied for a
20-year license renewal for the plant on behalf of Consumers. Certain parties
are seeking to intervene and have requested a hearing on the application. The
NRC has stated that it expects to take 22-30 months to review a license renewal
application. We expect a decision from the NRC in 2007. At this time, we cannot
determine what impact this will have on decommissioning costs or the adequacy of
funding.

     In December 2005, we announced plans to sell Palisades and have begun
pursuing this asset divestiture. As a sale is not probable to occur until a firm
purchase commitment is entered into with a potential buyer, we have not
classified the Palisades assets as held for sale on our Consolidated Balance
Sheets.

     NUCLEAR MATTERS:

     DOE Litigation: In 1997, a U.S. Court of Appeals decision confirmed that
the DOE was to begin accepting deliveries of spent nuclear fuel for disposal by
January 1998. Subsequent U.S. Court of Appeals litigation, in which we and other
utilities participated, has not been successful in producing more specific
relief for the DOE's failure to accept the spent nuclear fuel.

                                      CMS-63
<PAGE>
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     There are two court decisions that support the right of utilities to pursue
damage claims in the United States Court of Claims against the DOE for failure
to take delivery of spent nuclear fuel. Over 60 utilities have initiated
litigation in the United States Court of Claims. We filed our complaint in
December 2002. On April 29, 2005, the court ruled on various motions for summary
judgment filed by the DOE and us. The court denied the DOE's motions to dismiss
portions of the complaint including its motion seeking recovery of a one-time
fee payable by us prior to delivery of the spent nuclear fuel. The court granted
the DOE's motion to recoup this fee against any damages awarded to us. The court
granted our motion for summary judgment on liability. If our litigation against
the DOE is successful, we plan to use any recoveries to pay the cost of spent
nuclear fuel storage until the DOE takes possession as required by law. We can
make no assurance that the litigation against the DOE will be successful.

     In July 2002, Congress approved and the President signed a bill designating
the site at Yucca Mountain, Nevada, for the development of a repository for the
disposal of high-level radioactive waste and spent nuclear fuel. We expect that
the DOE, in due course, will submit a final license application to the NRC for
the repository. The application and review process is estimated to take several
years.

     Insurance: We maintain nuclear insurance coverage on our nuclear plants. At
Palisades, we maintain nuclear property insurance from NEIL totaling $2.750
billion and insurance that would partially cover the cost of replacement power
during certain prolonged accidental outages. Because NEIL is a mutual insurance
company, we could be subject to assessments of up to $28 million in any policy
year if insured losses in excess of NEIL's maximum policyholders surplus occur
at our, or any other member's, nuclear facility. NEIL's policies include
coverage for acts of terrorism.

     At Palisades, we maintain nuclear liability insurance for third-party
bodily injury and off-site property damage resulting from a nuclear energy
hazard for up to approximately $10.761 billion, the maximum insurance liability
limits established by the Price-Anderson Act. The United States Congress enacted
the Price-Anderson Act to provide financial liability protection for those
parties who may be liable for a nuclear accident or incident. Part of the
Price-Anderson Act's financial protection is a mandatory industry-wide program
under which owners of nuclear generating facilities could be assessed if a
nuclear incident occurs at any nuclear generating facility. The maximum
assessment against us could be $101 million per occurrence, limited to maximum
annual installment payments of $15 million.

     We also maintain insurance under a program that covers tort claims for
bodily injury to nuclear workers caused by nuclear hazards. The policy contains
a $300 million nuclear industry aggregate limit. Under a previous insurance
program providing coverage for claims brought by nuclear workers, we remain
responsible for a maximum assessment of up to $6 million. This requirement will
end December 31, 2007.

     Big Rock remains insured for nuclear liability by a combination of
insurance and a NRC indemnity totaling $544 million, and a nuclear property
insurance policy from NEIL.

     Insurance policy terms, limits, and conditions are subject to change during
the year as we renew our policies.

CONSUMERS' GAS UTILITY CONTINGENCIES

     GAS ENVIRONMENTAL MATTERS: We expect to incur investigation and remediation
costs at a number of sites under the Michigan Natural Resources and
Environmental Protection Act, a Michigan statute that covers environmental
activities including remediation. These sites include 23 former manufactured gas
plant facilities. We operated the facilities on these sites for some part of
their operating lives. For some of these sites, we have no current ownership or
may own only a portion of the original site. In 2005, we estimated our remaining
costs to be between $29 million and $71 million, based on 2005 discounted costs,
using a discount rate of three percent. The discount rate represents a 10-year
average of U.S. Treasury bond rates reduced for increases in the consumer price
index. We expect to fund most of these costs through insurance proceeds and
MPSC-approved rates. At December 31, 2005, we have a liability of $29 million,
net of $53 million of expenditures incurred to date, and a

                                      CMS-64
<PAGE>
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

regulatory asset of $62 million. Any significant change in assumptions, such as
an increase in the number of sites, different remediation techniques, nature and
extent of contamination, and legal and regulatory requirements, could affect our
estimate of remedial action costs.

     GAS TITLE TRACKING FEES AND SERVICES: On February 14, 2005, the FERC issued
its latest order involving Consumers' Gas Title Transfer Tracking Fees and
Services. In doing so, the FERC agreed with us that such orders only apply to a
title transfer tracking fee charged and collected in connection with Consumers'
FERC blanket transportation service. Because of the newly stated limits on what
fees are subject to refund, we believe that if any such refunds are ultimately
required, they will not be material.

CONSUMERS' GAS UTILITY RATE MATTERS

     GAS COST RECOVERY: The GCR process is designed to allow us to recover all
of our purchased natural gas costs if incurred under reasonable and prudent
policies and practices. The MPSC reviews these costs for prudency in an annual
reconciliation proceeding.

     We have one GCR reconciliation filing pending with the MPSC for the
2004-2005 GCR year. It was filed in June 2005. We have calculated a $2 million
net overrecovery for the GCR year, including interest through March 2005 and
refunds that we received from our suppliers, that are required to be refunded to
our customers. The case schedule has been suspended to allow for settlement
discussions.

     GCR plan for year 2005-2006: In December 2004, we filed an application with
the MPSC seeking approval of a GCR plan for the 12-month period of April 2005
through March 2006. Our request proposed using a GCR factor consisting of:

     - a base GCR factor of $6.98 per mcf, plus

     - a quarterly GCR ceiling price adjustment contingent upon future events.

     The GCR factor can be adjusted monthly, provided it remains at or below the
current ceiling price. The quarterly adjustment mechanism allows an increase in
the GCR ceiling price to reflect a portion of purchased natural gas cost
increases if the average NYMEX price for a specified period is greater than that
used in calculating the base GCR factor. Actual gas costs and revenues will be
subject to an annual reconciliation proceeding.

     In June 2005, four of the five parties filed a settlement agreement. The
fifth party filed a statement of non-objection. The settlement agreement
includes a GCR ceiling price adjustment contingent upon future events.

     In September 2005, we filed a motion with the MPSC seeking to reopen our
GCR plan for year 2005-2006. Since the settlement agreement entered into in June
2005, there have been unanticipated increases in the market price for natural
gas.

     In November 2005, the MPSC issued an Order related to our reopened GCR plan
for year 2005-2006. The order approved the June 2005 settlement agreement along
with a new GCR factor consisting of a fixed cap of $10.10 per mcf for the
December 2005 through March 2006 billing period. Our GCR factor for the billing
month of February 2006 is $8.20 per mcf. One of the intervenors in this case has
appealed the MPSC Order to the Michigan Court of Appeals. We are unable to
predict the outcome of this appeal.

     GCR plan for year 2006-2007: In December 2005, we filed an application with
the MPSC seeking approval of a GCR plan for the 12-month period of April 2006
through March 2007. Our request proposed using a GCR factor consisting of:

     - a base GCR factor of $11.10 per mcf, plus

     - a quarterly GCR ceiling price adjustment contingent upon future events.

                                      CMS-65
<PAGE>
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     2001 GAS DEPRECIATION CASE: In October and December 2004, the MPSC issued
Opinions and Orders in our gas depreciation case, which:

     - reaffirmed the previously ordered $34 million reduction in our
       depreciation expense,

     - required us to undertake a study to determine why our plant removal costs
       are in excess of other regulated Michigan natural gas utilities, and

     - required us to file a study report with the MPSC Staff on or before
       December 31, 2005.

     We filed the study report with the MPSC Staff on December 29, 2005.

     We are also required to file our next gas depreciation case within 90 days
after the MPSC issuance of a final order in the pending case related to ARO
accounting. We expect an MPSC order in the first quarter of 2006.

     If the depreciation case order is issued after the gas general rate case
order, we proposed to incorporate its results into the gas general rates using a
surcharge mechanism.

     2005 GAS RATE CASE: In July 2005, we filed an application with the MPSC
seeking a 12 percent authorized return on equity along with a $132 million
annual increase in our gas delivery and transportation rates. The primary
reasons for the request are recovery of new investments, carrying costs on
natural gas inventory related to higher gas prices, system maintenance, employee
benefits, and low-income assistance. If approved, the request would add
approximately 5 percent to the typical residential customer's average monthly
bill. The increase would also affect commercial and industrial customers.

     As part of this filing, we also requested interim rate relief of $75
million. The MPSC Staff and intervenors filed interim rate relief testimony on
October 31, 2005. In its testimony, the MPSC Staff recommended granting interim
rate relief of $38 million. As of February 2006, the MPSC has not acted on our
interim rate relief request.

     On February 13, 2006, the MPSC Staff recommended granting final rate relief
of $62 million. The MPSC Staff proposed that $17 million of this amount be
contributed to a low income energy efficiency fund. The MPSC Staff also
recommended reducing our return on common equity to 11.15 percent, from our
current 11.4 percent.

OTHER CONTINGENCIES

     EQUATORIAL GUINEA TAX CLAIM: CMS Energy received a request for
indemnification from Perenco, the purchaser of CMS Oil and Gas. The
indemnification claim relates to the sale by CMS Energy of its oil, gas and
methanol projects in Equatorial Guinea and the claim of the government of
Equatorial Guinea that $142 million in taxes is owed it in connection with that
sale. Based on information currently available, CMS Energy and its tax advisors
have concluded that the government's tax claim is without merit, and Perenco has
submitted a response to the government rejecting the claim. CMS Energy cannot
predict the outcome of this matter.

     GAS INDEX PRICE REPORTING LITIGATION: CMS Energy, CMS MST, CMS Field
Services, Cantera Natural Gas, Inc. (the company that purchased CMS Field
Services) and Cantera Gas Company are named as defendants in various lawsuits
arising as a result of false natural gas price reporting. Allegations include
manipulation of NYMEX natural gas futures and options prices, price-fixing
conspiracies, and artificial inflation of natural gas retail prices in
California, Tennessee and Kansas. CMS Energy and the other CMS Energy defendants
will defend themselves vigorously against these matters but cannot predict their
outcome.

     DEARBORN INDUSTRIAL GENERATION: In October 2001, Duke/Fluor Daniel (DFD)
presented DIG with a change order to their construction contract and filed an
action in Michigan state court claiming damages in the amount of $110 million,
plus interest and costs, which DFD states represents the cumulative amount owed
by DIG for delays DFD believes DIG caused and for prior change orders that DIG
previously rejected. DFD also filed a construction lien for the $110 million.
DIG, in addition to drawing down on three letters of credit totaling $30 million
that it obtained from DFD, filed an arbitration claim against DFD asserting in
excess of an additional

                                      CMS-66
<PAGE>
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

$75 million in claims against DFD. The judge in the Michigan state court case
entered an order staying DFD's prosecution of its claims in the court case and
permitting the arbitration to proceed. The arbitration hearing began October 10,
2005 and is scheduled to continue through mid-2006. DIG will continue to defend
itself vigorously and pursue its claims. CMS Energy cannot predict the outcome
of this matter.

     FORMER CMS OIL AND GAS OPERATIONS: A Michigan trial judge granted Star
Energy, Inc. and White Pine Enterprises, LLC a declaratory judgment in an action
filed in 1999 that claimed Terra Energy Ltd., a former CMS Oil and Gas
subsidiary, violated an oil and gas lease and other arrangements by failing to
drill wells it had committed to drill. A jury then awarded the plaintiffs a $7.6
million award. Terra appealed this matter to the Michigan Court of Appeals. The
Michigan Court of Appeals reversed the trial court judgment with respect to the
appropriate measure of damages and remanded the case for a new trial on damages.
The trial judge reinstated the judgment against Terra and awarded Terra title to
the minerals. Terra appealed this judgment. The court of appeals heard arguments
on May 19, 2005 and issued an opinion on May 26, 2005 remanding the case to the
trial court for a new trial on damages. The plaintiffs filed an application for
leave to appeal with the Michigan Supreme Court, which was denied. Enterprises
has an indemnity obligation with regard to losses to Terra that might result
from this litigation.

     CMS ENSENADA CUSTOMER DISPUTE: Pursuant to a long-term power purchase
agreement, CMS Ensenada sells power and steam to YPF Repsol at the YPF refinery
in La Plata, Argentina. As a result of the so-called "Emergency Laws," payments
by YPF Repsol under the power purchase agreement have been converted to pesos at
the exchange rate of one U.S. dollar to one Argentine peso. Such payments are
currently insufficient to cover CMS Ensenada's operating costs, including
quarterly debt service payments to the Overseas Private Investment Corporation
(OPIC). Enterprises is party to a Sponsor Support Agreement pursuant to which
Enterprises has guaranteed CMS Ensenada's debt service payments to OPIC up to an
amount which is in dispute, but which Enterprises estimates to be approximately
$7 million.

     The Argentine commercial court granted injunctive relief to CMS Ensenada
pursuant to an ex parte action, and such relief will remain in effect until
completion of arbitration on the matter, to be administered by the International
Chamber of Commerce. The arbitration hearing was held in July 2005 and a
decision from the arbitration panel is expected in the first quarter of 2006.

     ARGENTINA: As part of its energy privatization incentives, Argentina
directed CMS Gas Transmission to calculate tariffs in U.S. dollars, then convert
them to pesos at the prevailing exchange rate, and to adjust tariffs every six
months to reflect changes in inflation. Starting in early 2000, Argentina
suspended the inflation adjustments.

     In January 2002, the Republic of Argentina enacted the Public Emergency and
Foreign Exchange System Reform Act. This law repealed the fixed exchange rate of
one U.S. dollar to one Argentine peso, converted all dollar-denominated utility
tariffs and energy contract obligations into pesos at the same one-to-one
exchange rate, and directed the Government of Argentina to renegotiate such
tariffs.

     CMS Gas Transmission began arbitration proceedings against the Republic of
Argentina (Argentina) under the auspices of the International Centre for the
Settlement of Investment Disputes (ICSID) in mid-2001, citing breaches by
Argentina of the Argentine-U.S. Bilateral Investment Treaty (BIT). In May 2005,
an ICSID tribunal concluded, among other things, that Argentina's economic
emergency did not excuse Argentina from liability for violations of the BIT. The
ICSID tribunal found in favor of CMS Gas Transmission, and awarded damages of
U.S. $133 million, plus interest.

     The ICSID Convention provides that either party may seek annulment of the
award based upon five possible grounds specified in the Convention. Argentina's
Application for Annulment was formally registered by ICSID on September 27, 2005
and will be considered by a newly constituted panel.

                                      CMS-67
<PAGE>
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     On December 28, 2005, certain insurance underwriters paid the sum of $75
million to CMS Gas Transmission in respect of their insurance obligations
resulting from non-payment of the ICSID award. The payment, plus interest, is
subject to repayment by CMS Gas Transmission in the event that the ICSID award
is annulled. Pending the outcome of the annulment proceedings, CMS Energy
recorded the $75 million payment as deferred revenue at December 31, 2005.

     IRS RULING: In August 2005, the IRS issued Revenue Ruling 2005-53 and
regulations to provide guidance with respect to the use of the "simplified
service cost" method of tax accounting. We use this tax accounting method,
generally allowed by the IRS under section 263A of the Internal Revenue Code,
with respect to the allocation of certain corporate overheads to the tax basis
of self-constructed utility assets. Under the IRS guidance, significant issues
with respect to the application of this method remain unresolved and subject to
dispute. However, the effect of the IRS's position may be to require CMS Energy
either (1) to repay a portion of previously received tax benefits, or (2) to add
back to taxable income, half in each of 2005 and 2006, a significant portion of
previously deducted overheads. The impact of this matter on future earnings,
cash flows, or our present NOL carryforwards remains uncertain, but could be
material. We have recorded a reduction in our NOL carryforwards of $359 million
in 2005, and a corresponding reduction in deferred taxes related to property, to
reflect the estimated 2005 effect of the new regulation. For additional
information, see Note 9, Income Taxes. CMS Energy cannot predict the outcome of
this matter.

     OTHER: In addition to the matters disclosed within this Note, Consumers and
certain other subsidiaries of CMS Energy are parties to certain lawsuits and
administrative proceedings before various courts and governmental agencies
arising from the ordinary course of business. These lawsuits and proceedings may
involve personal injury, property damage, contractual matters, environmental
issues, federal and state taxes, rates, licensing, and other matters.

     We have accrued estimated losses for certain contingencies discussed within
this Note. Resolution of these contingencies is not expected to have a material
adverse impact on our financial position, liquidity, or future results of
operations.

     FASB INTERPRETATION NO. 45, GUARANTOR'S ACCOUNTING AND DISCLOSURE
REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF
OTHERS: The Interpretation requires the guarantor, upon issuance of a guarantee,
to recognize a liability for the fair value of the obligation it undertakes in
issuing the guarantee. The initial recognition and measurement provision of this
Interpretation does not apply to some guarantee contracts, such as product
warranties, derivatives, or guarantees between corporations under common
control, although disclosure of these guarantees is required.

     The following table describes our guarantees at December 31, 2005:

<Table>
<Caption>
                                                                               MAXIMUM     CARRYING
GUARANTEE DESCRIPTION         ISSUE DATE            EXPIRATION DATE           OBLIGATION    AMOUNT
---------------------         ----------            ---------------           ----------   --------
                                                                                  (IN MILLIONS)
<S>                          <C>             <C>                              <C>          <C>
Indemnifications from asset
  sales and other
  agreements(a)              October 1995    Indefinite                         $1,147      $   1
Standby letters of credit    Various         Various through December 2009          64         --
Surety bonds and other
  indemnifications           Various         Indefinite                             20         --
Other guarantees(b)          Various         Various through September 2027        255          1
Subsidiary guarantee of
  parent debt                May 2005        May 2010                               96         --
Nuclear insurance
  retrospective premiums     Various         Indefinite                            135         --
</Table>

-------------------------

                                      CMS-68
<PAGE>
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(a)  The majority of this amount arises from routine provisions in stock and
     asset sales agreements under which we indemnify the purchaser for losses
     resulting from events such as claims resulting from tax disputes and the
     failure of title to the assets or stock sold by us to the purchaser. We
     believe the likelihood of a loss for any remaining indemnifications to be
     remote.

(b)  In connection with our environmental remediation efforts at Bay Harbor, we
     have provided certain property owners with put options, which require us to
     purchase their properties under certain conditions. Some options may not be
     exercised for at least three years from the effective date of the option
     agreements unless certain events, such as bankruptcy or death of a spouse
     occur. If we were required to perform under these agreements, the maximum
     amount of our obligation would be equal to an amount representing the fair
     market value of the properties at that time, excluding any effects on the
     fair market value resulting from CKD-related environmental conditions.
     Expiration dates for these agreements vary from July 2013 to November 2017.
     At December 31, 2005, we recognized a liability of $1 million related to
     the options.

     The following table provides additional information regarding our
guarantees:

<Table>
<Caption>
                                                                       EVENTS THAT WOULD REQUIRE
GUARANTEE DESCRIPTION                          HOW GUARANTEE AROSE            PERFORMANCE
---------------------                          -------------------     -------------------------
<S>                                           <C>                      <C>
Indemnifications from asset sales and other   Stock and asset sales    Findings of
  agreements                                  agreements               misrepresentation, breach
                                                                       of warranties, and other
                                                                       specific events or
                                                                       circumstances
Standby letters of credit                     Normal operations of     Noncompliance with
                                              coal power plants        environmental regulations
                                                                       and inadequate response
                                                                       to demands for corrective
                                                                       action
                                              Natural gas              Nonperformance
                                              transportation
                                              Self-insurance           Nonperformance
                                              requirement
Surety bonds and other indemnifications       Normal operating         Nonperformance
                                              activity, permits and
                                              licenses
Other guarantees                              Normal operating         Nonperformance or non-
                                              activity                 payment by a subsidiary
                                                                       under a related contract
                                              Agreement to provide     Termination of the Steam
                                              power and steam to Dow   and Electric Power
                                                                       Agreement by Dow due to
                                                                       the MCV Partnership's
                                                                       nonperformance
                                              Bay Harbor remediation   Owners exercising put
                                              efforts                  options requiring us to
                                                                       purchase property
Subsidiary guarantee of parent debt           Loan agreement           Non-payment by CMS Energy
                                                                       and Enterprises of
                                                                       obligations under the
                                                                       loan agreement
Nuclear insurance retrospective premiums      Normal operations of     Call by NEIL and Price-
                                              nuclear plants           Anderson Act for nuclear
                                                                       incident
</Table>

                                      CMS-69
<PAGE>
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     At December 31, 2005, none of our guarantees contained provisions allowing
us to recover, from third parties, any amount paid under the guarantees. In the
ordinary course of business, we enter into agreements containing tax and other
indemnification provisions in connection with a variety of transactions,
including the sale of subsidiaries and assets, equipment leasing, service
agreements, employment agreements, and financing agreements. While we cannot
estimate our maximum exposure under these indemnities, we consider the
probability of liability remote.

     Project Financing: We enter into various project-financing security
arrangements such as equity pledge agreements and share mortgage agreements to
provide financial or performance assurance to third parties on behalf of certain
unconsolidated affiliates. Expiration dates for these agreements vary from March
2015 to June 2020 or terminate upon payment or cancellation of the obligation.
Non-payment or other act of default by an unconsolidated affiliate would trigger
enforcement of the security. If we were required to perform under these
agreements, the maximum amount of our obligation under these agreements would be
equal to the value of the shares relinquished to the guaranteed party at the
time of default.

                                      CMS-70
<PAGE>
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

4:  FINANCINGS AND CAPITALIZATION

     Long-term debt at December 31 follows:

<Table>
<Caption>
                                                       INTEREST RATE (%)       MATURITY      2005      2004
                                                       -----------------       --------      ----      ----
                                                                                             (IN MILLIONS)
<S>                                                    <C>                     <C>          <C>       <C>
CMS ENERGY CORPORATION
  Senior notes.....................................          9.875               2007       $  365    $  468
                                                             8.900               2008          260       260
                                                             7.500               2009          409       409
                                                             7.750               2010          300       300
                                                             8.500               2011          300       300
                                                             6.300               2012          150        --
                                                             6.875               2015          125        --
                                                             3.375(a)            2023          150       150
                                                             2.875(a)            2024          288       288
                                                                                            ------    ------
                                                                                             2,347     2,175
  General term notes and other.....................          7.327(b)                            2       225
                                                                                            ------    ------
    Total -- CMS Energy Corporation................                                          2,349     2,400
                                                                                            ------    ------
CONSUMERS ENERGY COMPANY
  First mortgage bonds.............................          4.250               2008          250       250
                                                             4.800               2009          200       200
                                                             4.400               2009          150       150
                                                             4.000               2010          250       250
                                                             5.000               2012          300       300
                                                             5.375               2013          375       375
                                                             6.000               2014          200       200
                                                             5.000               2015          225       225
                                                             5.500               2016          350       350
                                                             5.150               2017          250        --
                                                             5.650               2020          300        --
                                                             5.650               2035          150        --
                                                             5.800               2035          175        --
                                                                                            ------    ------
                                                                                             3,175     2,300
                                                                                            ------    ------
  Senior notes.....................................          6.250                              --       332
                                                             6.375               2008          159       159
                                                             6.875               2018          180       180
                                                             6.500                              --       141
                                                                                            ------    ------
                                                                                               339       812
                                                                                            ------    ------
  Securitization bonds.............................          5.295(c)          2006-2015       369       398
  FMLP debt........................................                                            207       296
  Nuclear fuel disposal liability..................                               (d)          145       141
  Tax-exempt pollution control revenue bonds.......        Various             2010-2035       161       126
  Long-term bank debt and other....................       Variable                              --        61
                                                                                            ------    ------
    Total -- Consumers Energy Company..............                                          4,396     4,134
                                                                                            ------    ------
OTHER SUBSIDIARIES.................................                                            363       208
                                                                                            ------    ------
Total principal amount outstanding.................                                          7,108     6,742
  Current amounts..................................                                           (289)     (267)
  Net unamortized discount.........................                                            (19)      (31)
                                                                                            ------    ------
Total long-term debt...............................                                         $6,800    $6,444
                                                                                            ======    ======
</Table>

-------------------------

(a)  Contingently convertible notes. See "Contingently Convertible Securities"
     section within this Note for further discussion of the conversion features.

(b)  Represents the weighted average interest rate of $220 million of general
     term notes at December 31, 2004.

(c)  Represents the weighted average interest rate at December 31, 2005 (5.188
     percent at December 31, 2004).

(d)  Maturity date uncertain.

                                      CMS-71
<PAGE>
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     FINANCINGS: The following is a summary of significant long-term debt
issuances and retirements during 2005:

<Table>
<Caption>
                                     PRINCIPAL                            ISSUE/RETIREMENT
                                   (IN MILLIONS)    INTEREST RATE (%)           DATE           MATURITY DATE
                                   -------------    -----------------     ----------------     -------------
<S>                                <C>              <C>                  <C>                   <C>
DEBT ISSUANCES:
CMS ENERGY
  Senior notes.................       $  150                6.30            January 2005       February 2012
  Senior notes                           125               6.875           December 2005       December 2015
CONSUMERS
  FMB..........................          250                5.15            January 2005       February 2017
  FMB..........................          300                5.65             March 2005          April 2020
  FMB insured quarterly notes            150                5.65             April 2005          April 2035
  LORB.........................           35            Variable             April 2005          April 2035
  FMB..........................          175                5.80            August 2005        September 2035
ENTERPRISES
  CMS Generation Bank Loan (a)           149            Variable           December 2005       December 2008
                                      ------
       Total...................       $1,334
                                      ======
DEBT RETIREMENTS:
CMS ENERGY
  General term notes...........       $  220             Various            January and           Various
                                                                           February 2005
  Senior notes.................          103               9.875            July through        October 2007
                                                                           September 2005
CONSUMERS
  Long-term bank debt..........           60            Variable            January 2005       November 2006
  Long-term debt -- related
     parties...................          180                9.25            January 2005       December 2029
  Long-term debt -- related
     parties...................           73                8.36           February 2005       December 2015
  Long-term debt -- related
     parties...................          124                8.20           February 2005       September 2027
  Senior notes.................          332                6.25         April and May 2005    September 2006
  Senior insured quarterly
     notes.....................          141                6.50              May 2005          October 2028
  FMLP debt....................           89             Various             July 2005           July 2005
                                      ------
       Total...................       $1,322
                                      ======
</Table>

-------------------------

(a)  The CMS Generation bank loan is a $150 million term loan in two tranches.
     Tranche A outstanding is $102 million and bears interest at six month LIBOR
     plus 250 basis points (7.17 percent at December 31, 2005.) Tranche B
     outstanding is 40 million Euros (US dollar equivalent of $47 million at
     December 31, 2005) and bears interest at six month EURIBOR plus 250 basis
     points (5.12 percent at December 31, 2005). The term loan matures in
     December 2008.

     Costs associated with CMS Energy's 2005 senior notes issuances totaled $5
million and are being amortized over the lives of the related debt. Costs
associated with Consumers' 2005 debt issuances totaled $13 million and are also
being amortized over the lives of the related debt. Call premiums associated
with CMS Energy's debt retirements totaled $10 million and were charged to other
expense. Call premiums associated with Consumers' debt retirements totaled $10
million and are being amortized over the lives of the newly issued debt.

     FIRST MORTGAGE BONDS: Consumers secures its FMB by a mortgage and lien on
substantially all of its property. Its ability to issue and sell securities is
restricted by certain provisions in the first mortgage bond

                                      CMS-72
<PAGE>
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

indenture, its articles of incorporation, and the need for regulatory approvals
under federal law. See "FMB Indenture Limitations" section within this Note.

     SECURITIZATION BONDS: Certain regulatory assets collateralize
Securitization bonds. Consumers is not the owner of these regulatory assets. The
bondholders have no recourse to our other assets. Through Consumers' rate
structure, we bill customers for securitization surcharges to fund the payment
of principal, interest, and other related expenses on the Securitization bonds.
Securitization surcharges collected are remitted to a trustee for the
Securitization bonds and are not available to creditors of Consumers or its
affiliates. Securitization surcharges totaled $50 million annually in 2005 and
in 2004.

     FMLP DEBT: We consolidate the FMLP in accordance with Revised FASB
Interpretation No. 46. At December 31, long-term debt of the FMLP consists of:

<Table>
<Caption>
                                                                MATURITY    2005       2004
                                                                --------    ----       ----
                                                                               (IN MILLIONS)
<S>                                                             <C>         <C>     <C>
11.75% subordinated secured notes...........................                $ --       $ 70
13.25% subordinated secured notes...........................      2006        56         75
6.875% tax-exempt subordinated secured notes................      2009       137        137
6.750% tax-exempt subordinated secured notes................      2009        14         14
                                                                            ----       ----
  Total amount outstanding..................................                $207       $296
                                                                            ====       ====
</Table>

     The FMLP debt is secured by certain assets of the MCV Partnership and the
FMLP. The debt is non-recourse to other assets of CMS Energy and Consumers.

     LONG-TERM DEBT -- RELATED PARTIES: CMS Energy and Consumers each formed
various statutory wholly-owned business trusts for the sole purpose of issuing
preferred securities and lending the gross proceeds to themselves. The sole
assets of the trusts consist of the debentures described in the following table.
These debentures have terms similar to those of the mandatorily redeemable
preferred securities the trusts issued. We determined that we do not hold the
controlling financial interest in our trust preferred security structures.
Accordingly, those entities are reflected in Long-term debt -- related parties.

     The following is a summary of Long-term debt -- related parties at December
31:

<Table>
<Caption>
DEBENTURE AND RELATED PARTY                               INTEREST RATE (%)    MATURITY    2005     2004
---------------------------                               -----------------    --------    ----     ----
                                                                                           (IN MILLIONS)
<S>                                                       <C>                  <C>         <C>      <C>
Convertible subordinated debentures,
  CMS Energy Trust I..................................          7.75             2027      $ 178    $ 178
Subordinated deferrable interest notes:
  Consumers Power Company Financing I.................          8.36                          --       73
  Consumers Energy Company Financing II...............          8.20                          --      124
Subordinated debentures:
  Consumers Energy Company Financing III..............          9.25                          --      180
  Consumers Energy Company Financing IV(a)............          9.00             2031        129      129
                                                                                           -----    -----
Total principal amounts outstanding...................                                       307      684
  Current amounts.....................................                                      (129)    (180)
                                                                                           -----    -----
Total Long-term debt -- related parties...............                                     $ 178    $ 504
                                                                                           =====    =====
</Table>

-------------------------

(a)  Extinguished in February 2006.

     In the event of default, holders of the Trust Preferred Securities would be
entitled to exercise and enforce the trusts' creditor rights against us, which
may include acceleration of the principal amount due on the debentures.

                                      CMS-73
<PAGE>
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

CMS Energy and Consumers, as applicable, have issued certain guarantees with
respect to payments on the preferred securities. These guarantees, when taken
together with our obligations under the debentures, related indenture and trust
documents, provide full and unconditional guarantees for the trusts' obligations
under the preferred securities.

     DEBT MATURITIES: At December 31, 2005, the aggregate annual maturities for
long-term debt and long-term debt -- related parties for the next five years
are:

<Table>
<Caption>
                                                                            PAYMENTS DUE
                                                               --------------------------------------
                                                               2006      2007    2008    2009    2010
                                                               ----      ----    ----    ----    ----
                                                                           (IN MILLIONS)
<S>                                                            <C>       <C>     <C>     <C>     <C>
Long-term debt and long-term debt -- related parties.......    $418(a)   $459    $938    $874    $655
</Table>

-------------------------

(a)  Includes $150 million of CMS Energy's contingently convertible senior notes
     and $129 million of long-term debt -- related parties. See "Contingently
     Convertible Securities" section within this Note.

     REGULATORY AUTHORIZATION FOR FINANCINGS: In April 2005, the FERC issued an
authorization to permit Consumers to issue up to an additional $1.0 billion
($2.0 billion in total) of long-term securities for refinancing or refunding
purposes, and up to an additional $1.0 billion ($2.5 billion in total) of
long-term securities for general corporate purposes during the period ending
June 30, 2006.

     Combined with remaining availability from previously issued FERC
authorizations, Consumers can now issue up to:

     - $876 million of long-term securities for refinancing or refunding
       purposes,

     - $1.159 billion of long-term securities for general corporate purposes,
       and

     - $1.935 billion of long-term FMB to be issued solely as collateral for
       other long-term securities.

     FMB INDENTURE LIMITATIONS: Irrespective of Consumers' existing FERC
authorization, its ability to issue FMB as primary obligations or as collateral
for financing is governed by certain provisions of their indenture dated
September 1, 1945 and its subsequent supplements. Due to the adverse impact of
the MCV Partnership asset impairment charge recorded in September 2005 on the
net earnings coverage test in one of the governing bond-issuance provisions of
the indenture, Consumers expects its ability to issue additional FMB will be
limited to $298 million through September 30, 2006. After September 30, 2006,
Consumers' ability to issue FMB in excess of $298 million will be based on
achieving a two-times FMB interest coverage ratio.

     REVOLVING CREDIT FACILITIES: The following secured revolving credit
facilities with banks are available at December 31, 2005:

<Table>
<Caption>
                                                                                     OUTSTANDING
                                                            AMOUNT OF     AMOUNT     LETTERS-OF-     AMOUNT
COMPANY                                  EXPIRATION DATE    FACILITY     BORROWED      CREDIT       AVAILABLE
-------                                  ---------------    ---------    --------    -----------    ---------
                                                                              (IN MILLIONS)
<S>                                      <C>                <C>          <C>         <C>            <C>
CMS Energy...........................     May 18, 2010        $300        $  --          $96          $204
Consumers............................     May 18, 2010         500           --           36           464
MCV Partnership......................    August 26, 2006        50           --            2            48
</Table>

     DIVIDEND RESTRICTIONS: Our amended and restated $300 million secured
revolving credit facility restricts payments of dividends on our common stock
during a 12-month period to $150 million, dependent on the aggregate amounts of
unrestricted cash and unused commitments under the facility.

     Under the provisions of its articles of incorporation, at December 31,
2005, Consumers had $179 million of unrestricted retained earnings available to
pay common stock dividends. Covenants in Consumers' debt facilities

                                      CMS-74
<PAGE>
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

cap common stock dividend payments at $300 million in a calendar year. During
2005, we received $277 million of common stock dividends from Consumers.

     SALE OF ACCOUNTS RECEIVABLE: Under a revolving accounts receivable sales
program, Consumers currently sells certain accounts receivable to a wholly
owned, consolidated, bankruptcy remote special purpose entity. In turn, the
special purpose entity may sell an undivided interest in up to $325 million of
the receivables. The special purpose entity sold $325 million of receivables at
December 31, 2005 and $304 million of receivables at December 31, 2004.
Consumers continues to service the receivables sold to the special purpose
entity. The purchaser of the receivables has no recourse against Consumers'
other assets for failure of a debtor to pay when due and no right to any
receivables not sold. Consumers has neither recorded a gain or loss on the
receivables sold nor retained interest in the receivables sold.

     Certain cash flows under Consumers' accounts receivable sales program are
shown in the following table:

<Table>
<Caption>
YEARS ENDED DECEMBER 31                                        2005     2004
-----------------------                                        ----     ----
                                                               (IN MILLIONS)
<S>                                                           <C>      <C>
Net cash flow as a result of accounts receivable
  financing.................................................  $   21   $    7
Collections from customers..................................  $4,859   $4,541
</Table>

     CAPITALIZATION: The authorized capital stock of CMS Energy consists of:

     - 350 million shares of CMS Energy Common Stock, par value $0.01 per share,
       and

     - 10 million shares of CMS Energy Preferred Stock, par value $0.01 per
       share.

     In April 2005, we issued 23 million shares of our common stock at a price
of $12.25 per share. We realized net proceeds of $272 million.

     PREFERRED STOCK: Our Preferred Stock outstanding follows:

<Table>
<Caption>
                                                                 NUMBER OF SHARES
                                                              ----------------------
DECEMBER 31                                                     2005         2004       2005     2004
-----------                                                     ----         ----       ----     ----
                                                                                        (IN MILLIONS)
<S>                                                           <C>          <C>          <C>      <C>
Preferred Stock
  4.50% convertible,
     Authorized 10,000,000 shares(a)......................    5,000,000    5,000,000    $250     $250
  Preferred subsidiary interest...........................                                11       11
                                                                                        ----     ----
Total Preferred stock.....................................                              $261     $261
                                                                                        ====     ====
</Table>

-------------------------
(a)  See the "Contingently Convertible Securities" section within this Note for
     further discussion of the convertible preferred stock.

     PREFERRED STOCK OF SUBSIDIARY: Consumers' Preferred Stock outstanding
follows:

<Table>
<Caption>
                                                            OPTIONAL      NUMBER OF SHARES
                                                           REDEMPTION    ------------------
DECEMBER 31                                      SERIES      PRICE        2005       2004      2005     2004
-----------                                      ------    ----------     ----       ----      ----     ----
                                                                                               (IN MILLIONS)
<S>                                              <C>       <C>           <C>        <C>        <C>      <C>
Preferred Stock
  Cumulative $100 par value, Authorized
     7,500,000 shares, with no mandatory
     redemption..............................    $4.16      $103.25       68,451     68,451     $ 7      $ 7
                                                 $4.50      $110.00      373,148    373,148      37       37
                                                                                                ---      ---
Total Preferred stock of subsidiary..........                                                   $44      $44
                                                                                                ===      ===
</Table>

                                      CMS-75
<PAGE>
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     CONTINGENTLY CONVERTIBLE SECURITIES: At December 31, 2005, the significant
terms of our contingently convertible securities were as follows:

<Table>
<Caption>
                                                             NUMBER       OUTSTANDING     CONVERSION    TRIGGER
CONTINGENTLY CONVERTIBLE SECURITY               MATURITY    OF UNITS     (IN MILLIONS)      PRICE        PRICE
---------------------------------               --------    ---------    -------------    ----------    -------
<S>                                             <C>         <C>          <C>              <C>           <C>
4.50% preferred stock.......................       N/A      5,000,000        $250           $ 9.89      $11.87
3.375% senior notes.........................      2023        150,000        $150           $10.67      $12.81
2.875% senior notes.........................      2024        287,500        $288           $14.75      $17.70
</Table>

     The note holders have the right to require us to purchase the 3.375 percent
convertible senior notes at par on July 15, 2008, 2013, and 2018. The note
holders have the right to require us to purchase the 2.875 percent convertible
senior notes at par on December 1, 2011, 2014, and 2019. On or after December 5,
2008, we may cause the 4.50 percent convertible preferred stock to convert if
the closing price of our common stock remains at or above $12.86 for 20 of any
30 consecutive trading days. The $12.86 price may be adjusted if there is a
payment or distribution to our common stockholders.

     The securities become convertible for a calendar quarter if the price of
our common stock remains at or above the trigger price for 20 of 30 consecutive
trading days ending on the last trading day the previous quarter. The trigger
price at which these securities become convertible is 120 percent of the
conversion price, which may be adjusted if there is a payment or distribution to
our common stockholders. All of our contingently convertible securities require
us, if converted, to pay cash up to the principal (or par) amount of the
securities and any conversion value in excess of that amount in shares of our
common stock. In December 2005, the trigger price contingency was met for our
4.50 percent convertible preferred stock and our 3.375 percent convertible
senior notes. As a result, these securities are convertible at the option of the
security holders during the three months ended March 31, 2006. As of February
2006, none of the security holders have notified us of their intention to
convert these securities.

     Once the 3.375 percent contingently convertible senior notes became
convertible in June 2005, they held the characteristics of a current liability.
Therefore, in June 2005, we reclassified the 3.375 percent contingently
convertible senior notes from Long-term debt to Current portion of long-term
debt. We will classify the 3.375 percent senior notes as Current portion of
long-term debt during the periods that they are outstanding and convertible.

                                      CMS-76
<PAGE>
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5: EARNINGS PER SHARE

     The following table presents the basic and diluted earnings per share
computations:

<Table>
<Caption>
YEARS ENDED DECEMBER 31                                          2005      2004      2003
-----------------------                                          ----      ----      ----
                                                                   (IN MILLIONS, EXCEPT
                                                                    PER SHARE AMOUNTS)
<S>                                                             <C>       <C>       <C>
EARNINGS AVAILABLE TO COMMON STOCKHOLDERS
  Income (Loss) from Continuing Operations..................    $  (98)   $  127    $  (42)
  Less Preferred Dividends..................................       (10)      (11)       (1)
                                                                ------    ------    ------
  Income (Loss) from Continuing Operations Available to
     Common Stockholders -- Basic...........................    $ (108)   $  116    $  (43)
  Add dilutive impact of Contingently Convertible Securities
     (net of tax)...........................................        --         1        --
                                                                ------    ------    ------
  Income (Loss) from Continuing Operations Available to
     Common Stockholders -- Diluted.........................    $ (108)   $  117    $  (43)
                                                                ======    ======    ======
AVERAGE COMMON SHARES OUTSTANDING APPLICABLE TO BASIC AND
  DILUTED EPS
  Weighted Average Shares -- Basic..........................     211.8     168.6     150.4
  Add dilutive impact of Contingently Convertible
     Securities.............................................        --       3.0        --
  Add dilutive Stock Options and Warrants...................        --       0.5        --
                                                                ------    ------    ------
  Weighted Average Shares -- Diluted........................     211.8     172.1     150.4
                                                                ======    ======    ======
EARNINGS (LOSS) PER AVERAGE COMMON SHARE AVAILABLE TO COMMON
  STOCKHOLDERS
  Basic.....................................................    $(0.51)   $ 0.68    $(0.30)
  Diluted...................................................    $(0.51)   $ 0.67    $(0.30)
</Table>

     Contingently Convertible Securities: Due to antidilution, there was no
impact to diluted EPS from our contingently convertible securities for the years
ended 2005 and 2003. Assuming positive income from continuing operations, our
contingently convertible securities dilute EPS to the extent that the conversion
value, which is based on the average market price of our common stock, exceeds
the principal or par value. Had there been positive income from continuing
operations for the year ended 2005, our contingently convertible securities
would have contributed an additional 10.9 million shares to the calculation of
diluted EPS. For additional details on our contingently convertible securities,
see Note 4, Financings and Capitalization.

     Stock Options and Warrants: Due to antidilution, for the year ended 2005,
there was no impact to diluted EPS from options and warrants to purchase 3.5
million shares of common stock and from 1.7 million shares of unvested
restricted stock. For the year ended 2004, since the exercise price was greater
than the average market price of the common stock, there was no impact to
diluted EPS from options and warrants to purchase 4.5 million shares of common
stock. Due to antidilution, for the year ended 2003, there was no impact to
diluted EPS from options and warrants to purchase 6.0 million shares of common
stock.

     Convertible Debentures: Due to antidilution, for the years ended 2005,
2004, and 2003, there was no impact to diluted EPS from our 7.75 percent
convertible subordinated debentures. Using the if-converted method, the
debentures would have:

     - decreased the numerator of diluted EPS by $8.7 million from an assumed
       reduction of interest expense, net of tax, and

     - increased the denominator of diluted EPS by 4.2 million shares.

                                      CMS-77
<PAGE>
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     We can revoke the conversion rights if certain conditions are met.

     In April 2005, we issued 23 million shares of our common stock. For
additional details, see Note 4, Financings and Capitalization.

6: FINANCIAL AND DERIVATIVE INSTRUMENTS

     FINANCIAL INSTRUMENTS: The carrying amounts of cash, short-term
investments, and current liabilities approximate their fair values because of
their short-term nature. We estimate the fair values of long-term financial
instruments based on quoted market prices or, in the absence of specific market
prices, on quoted market prices of similar instruments, or other valuation
techniques.

     The cost and fair value of our long-term financial instruments are as
follows:

<Table>
<Caption>
                                                        2005                               2004
                                           -------------------------------    -------------------------------
                                                      FAIR     UNREALIZED                FAIR     UNREALIZED
DECEMBER 31                                 COST     VALUE     GAIN (LOSS)     COST     VALUE     GAIN (LOSS)
-----------                                 ----     -----     -----------     ----     -----     -----------
                                                                     (IN MILLIONS)
<S>                                        <C>       <C>       <C>            <C>       <C>       <C>
Long-term debt(a)......................    $7,089    $7,315       $(226)      $6,711    $7,052       $(341)
Long-term debt -- related parties(b)...       307       280          27          684       653          31

Available-for-sale securities:
SERP:
  Equity securities....................        34        49          15           33        47          14
  Debt securities(d)...................        17        17          --           20        20          --
Nuclear decommissioning investments(c):
  Equity securities....................       134       252         118          136       262         126
  Debt securities(d)...................       287       291           4          291       302          11
</Table>

-------------------------
(a)  Includes current maturities of $289 million at December 31, 2005 and $267
     million at December 31, 2004. Settlement of long-term debt is generally not
     expected until maturity.

(b)  Includes current maturities of $129 million at December 31, 2005 and $180
     million at December 31, 2004.

(c)  Nuclear decommissioning investments include cash and cash equivalents and
     accrued income totaling $12 million at December 31, 2005 and $11 million at
     December 31, 2004. Unrealized gains and losses on nuclear decommissioning
     investments are reflected as regulatory liabilities.

(d)  The fair value of available-for-sale debt securities by contractual
     maturity at December 31, 2005 is as follows:

<Table>
<Caption>
                                                                    (IN MILLIONS)
    <S>                                                             <C>
    Due in one year or less.....................................        $ 15
    Due after one year through five years.......................         104
    Due after five years through ten years......................          69
    Due after ten years.........................................         120
                                                                        ----
      Total.....................................................        $308
                                                                        ====
</Table>

     Our held-to-maturity investments consist of debt securities held by the MCV
Partnership totaling $91 million at December 31, 2005 and $139 million at
December 31, 2004. These securities represent funds restricted primarily for
future lease payments and are classified as Other assets on our Consolidated
Balance Sheets. These investments have original maturity dates of approximately
one year or less and, because of their short-term maturities, carrying amounts
approximate fair value.

                                      CMS-78
<PAGE>
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     DERIVATIVE INSTRUMENTS: We are exposed to market risks including, but not
limited to, changes in interest rates, commodity prices, currency exchange
rates, and equity security prices. We may use various contracts to manage these
risks, including swaps, options, futures, and forward contracts. We enter into
these risk management contracts using established policies and procedures, under
the direction of both:

     - an executive oversight committee consisting of senior management
       representatives, and

     - a risk committee consisting of business unit managers.

     Our intention is that any increases or decreases in the value of these
contracts will be offset by an opposite change in the value of the item at risk.
We classify these contracts as either non-trading or trading.

     The contracts we use to manage market risks may qualify as derivative
instruments that are subject to derivative and hedge accounting under SFAS No.
133. If a contract is a derivative, it is recorded on the balance sheet at its
fair value. We then adjust the resulting asset or liability each quarter to
reflect any change in the market value of the contract, a practice known as
marking the contract to market. If a derivative qualifies for cash flow hedge
accounting treatment, the changes in fair value (gains or losses) are reported
in accumulated other comprehensive income; otherwise, the changes are reported
in earnings.

     For a derivative instrument to qualify for hedge accounting:

     - the relationship between the derivative instrument and the item being
       hedged must be formally documented at inception,

     - the derivative instrument must be highly effective in offsetting the
       hedged item's cash flows or changes in fair value, and

     - if hedging a forecasted transaction, the forecasted transaction must be
       probable.

     If a derivative qualifies for cash flow hedge accounting treatment and
gains or losses are recorded in accumulated other comprehensive income, those
gains or losses will be reclassified into earnings in the same period or periods
the hedged forecasted transaction affects earnings. If a cash flow hedge is
terminated early because it is determined that the forecasted transaction will
not occur, any gain or loss recorded in accumulated other comprehensive income
at that date is recognized immediately in earnings. If a cash flow hedge is
terminated early for other economic reasons, any gain or loss as of the
termination date is deferred and then reclassified to earnings when the
forecasted transaction affects earnings. The ineffective portion, if any, of all
hedges is recognized in earnings.

     To determine the fair value of our derivatives, we use information from
external sources (i.e., quoted market prices and third-party valuations), if
available. For certain contracts, this information is not available and we must
use mathematical valuation models to value our derivatives. These models require
various inputs and assumptions, including commodity market prices and
volatilities, as well as interest rates and contract maturity dates. The cash
returns we actually realize on these contracts may vary, either positively or
negatively, from the results that we estimate using these models. As part of
valuing our derivatives at market, we maintain reserves, if necessary, for
credit risks arising from the financial condition of counterparties.

     The majority of our commodity purchase and sale contracts are not subject
to derivative accounting under SFAS No. 133 because:

     - they do not have a notional amount (that is, a number of units specified
       in a derivative instrument, such as MW of electricity or bcf of natural
       gas),

     - they qualify for the normal purchases and sales exception, or

     - there is not an active market for the commodity.

                                      CMS-79
<PAGE>
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     Our coal purchase contracts are not derivatives because there is not an
active market for the coal we purchase. Similarly, certain of our electric
capacity and energy contracts are not derivatives due to the lack of an active
energy market in Michigan. If active markets for these commodities develop in
the future, some of these contracts may qualify as derivatives. For our coal
purchase contracts, the resulting mark-to-market impact on earnings could be
material. For our electric capacity and energy contracts, we believe that we
would be able to apply the normal purchases and sales exception to the majority
of these contracts (including the MCV PPA) and, therefore, would not be required
to mark these contracts to market.

     The MISO began operating the Midwest Energy Market on April 1, 2005. By
operating the Midwest Energy Market, the MISO centrally dispatches electricity
and transmission service throughout much of the Midwest and provides day-ahead
and real-time energy market information. At this time, we believe that the
establishment of this market does not represent the development of an active
energy market in Michigan, as defined by SFAS No. 133. However, as the Midwest
Energy Market matures, we will continue to monitor its activity level and
evaluate if an active energy market may exist in Michigan.

     Derivative accounting is required for certain contracts used to limit our
exposure to interest rate risk, commodity price risk, and foreign exchange risk.
The following table summarizes our derivative instruments:

<Table>
<Caption>
DECEMBER 31                                                  2005                            2004
-----------                                      ----------------------------    ----------------------------
                                                         FAIR     UNREALIZED             FAIR     UNREALIZED
DERIVATIVE INSTRUMENTS                           COST    VALUE    GAIN (LOSS)    COST    VALUE    GAIN (LOSS)
----------------------                           ----    -----    -----------    ----    -----    -----------
                                                                        (IN MILLIONS)
<S>                                              <C>     <C>      <C>            <C>     <C>      <C>
Non-trading:
  Interest rate risk contracts...............    $ --    $ --        $ --        $ --    $  (1)      $  (1)
  Gas supply option contracts................       1      (1)         (2)          2       --          (2)
  FTRs.......................................      --       1           1          --       --          --
Derivative contracts associated with the MCV
  Partnership:
  Long-term gas contracts....................      --     205         205          --       56          56
  Gas futures and swaps......................      --     223         223          --       64          64
CMS ERM contracts:
  Non-trading electric/gas contracts.........      --     (63)        (63)         --     (199)       (199)
  Trading electric/gas contracts.............      (3)    100         103          (4)     201         205
Derivative contracts associated with equity
  investments in:
  Shuweihat..................................      --     (20)        (20)         --      (25)        (25)
  Taweelah...................................     (35)    (17)         18         (35)     (24)         11
  Jorf Lasfar................................      --      (8)         (8)         --      (11)        (11)
  Other......................................      --       1           1          --       --          --
</Table>

     We record the fair value of our interest rate risk contracts, gas supply
option contracts, FTRs, and the derivative contracts associated with the MCV
Partnership in Derivative instruments, Other assets, or Other liabilities on our
Consolidated Balance Sheets. We include the fair value of the derivative
contracts held by CMS ERM in either Price risk management assets or Price risk
management liabilities on our Consolidated Balance Sheets. The fair value of
derivative contracts associated with our equity investments is included in
Investments -- Enterprises on our Consolidated Balance Sheets.

     INTEREST RATE RISK CONTRACTS: We use interest rate contracts, such as swaps
and collars, to hedge the risk associated with future interest payments on
variable-rate debt and to reduce the impact of interest rate fluctuations. At
December 31, 2005, we have recorded derivative liabilities totaling less than $1
million associated with the fair value of interest rate contracts, effectively
hedging long-term variable-rate debt with a notional amount of $24 million. At
December 31, 2004, we recorded derivative liabilities totaling $1 million,

                                      CMS-80
<PAGE>
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

effectively hedging long-term variable-rate debt with a notional amount of $25
million. The notional amount reflects the principal amount of variable-rate debt
being fixed.

     While all of our interest rate contracts effectively hedge the economic
risks associated with variable-rate debt, only some of the contracts qualify as
cash flow hedges. At December 31, 2005, we have recorded an unrealized loss of
less than $1 million, net of tax, in Accumulated other comprehensive loss
relating to the interest rate contracts that we have designated as cash flow
hedges. We expect to reclassify this amount as a decrease to earnings during the
next 12 months. There was no ineffectiveness associated with any of the interest
rate contracts that qualified for cash flow hedge accounting treatment.

     GAS SUPPLY OPTION CONTRACTS: Our gas utility business uses fixed-priced
weather-based gas supply call options and fixed-priced gas supply call and put
options to meet our regulatory obligation to provide gas to our customers at a
reasonable and prudent cost. As part of the GCR process, the mark-to-market
gains and losses associated with these options are reported directly in earnings
as part of Other income, and then immediately reversed out of earnings and
recorded on the balance sheet as a regulatory asset or liability. At December
31, 2005, we had purchased fixed-priced weather-based gas supply call options
and had sold fixed-priced gas supply put options.

     FTRS: With the establishment of the Midwest Energy Market, FTRs were
established. FTRs are financial instruments that manage price risk related to
electricity transmission congestion. An FTR entitles its holder to receive
compensation (or, conversely, to remit payment) for congestion-related
transmission charges.

     DERIVATIVE CONTRACTS ASSOCIATED WITH THE MCV PARTNERSHIP:

     Long-term gas contracts: The MCV Partnership uses long-term gas contracts
to purchase, and manage the cost of, the natural gas it needs to generate
electricity and steam. The MCV Partnership believes that certain of these
contracts qualify as normal purchases under SFAS No. 133. Accordingly, we have
not recognized these contracts at fair value on our Consolidated Balance Sheets
at December 31, 2005.

     The MCV Partnership also holds certain long-term gas contracts that do not
qualify as normal purchases because these contracts contain volume optionality.
In addition, as a result of implementing the RCP in January 2005, a significant
portion of long-term gas contracts no longer qualify as normal purchases,
because the gas will not be used to generate electricity or steam. Accordingly,
all of these contracts are accounted for as derivatives, with changes in fair
value recorded in earnings each quarter. For the year ended December 31, 2005,
we recorded a $149 million gain, before considering tax effects and minority
interest, associated with the increase in fair value of these long-term gas
contracts. This gain is included in the total Fuel costs mark-to-market at MCV
on our Consolidated Statements of Income (Loss). As a result of mark-to-market
gains, we have recorded derivative assets totaling $205 million associated with
the fair value of long-term gas contracts on our Consolidated Balance Sheets.
Because of the volatility of the natural gas market, the MCV Partnership expects
future earnings volatility on these contracts, since gains and losses will be
recorded each quarter. We expect almost all of these derivative assets to
reverse through earnings during 2006 and 2007 as the gas is purchased, with the
remainder reversing between 2008 and 2011. Due to the impairment of the MCV
Facility, the equity held by the minority interest owners of the MCV Partnership
has decreased significantly. Since we have the controlling financial interest in
the MCV Partnership, we will assume 100 percent of future losses recognized from
the reversal of these assets, not just our proportionate share.

     For further details on the RCP, see Note 3, Contingencies, "Other
Consumers' Electric Utility Contingencies -- The Midland Cogeneration Venture."

                                      CMS-81
<PAGE>
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     Gas Futures and Swaps: The MCV Partnership enters into natural gas futures,
options, and over-the-counter swap transactions in order to hedge against
unfavorable changes in the market price of natural gas. The MCV Partnership uses
these financial instruments to:

     - ensure an adequate supply of natural gas for the projected generation and
       sales of electricity and steam, and

     - manage price risk by fixing the price to be paid for natural gas on some
       of its long-term gas contracts.

     At December 31, 2005, the MCV Partnership only held natural gas futures and
swaps. Because of increases in the market price of natural gas, the fair value
of these contracts increased significantly during 2005. As a result of
mark-to-market gains, we have recorded derivative assets totaling $223 million
associated with the fair value of these contracts on our Consolidated Balance
Sheets. Certain of these contracts, representing $172 million, qualify for cash
flow hedge accounting and we record our proportionate share of their
mark-to-market gains and losses in Accumulated other comprehensive loss. The
remaining contracts, representing $51 million, are not cash flow hedges and
their mark-to-market gains and losses are recorded to earnings.

     The contracts that qualify as cash flow hedges are used to ensure an
adequate supply of natural gas for the projected generation and sales of
electricity and steam. At December 31, 2005, we have recorded a cumulative net
gain of $56 million, net of tax and minority interest, in Accumulated other
comprehensive loss relating to our proportionate share of the cash flow hedges
held by the MCV Partnership. Of this balance, we expect to reclassify $15
million, net of tax and minority interest, as an increase to earnings during the
next 12 months as the contracts settle, offsetting the costs of gas purchases,
with the remainder to be realized through 2009. There was no ineffectiveness
associated with any of these cash flow hedges.

     The futures and swap contracts that do not qualify as cash flow hedges are
used by the MCV Partnership to manage price risk by fixing the price to be paid
for natural gas on some of its variable-priced long-term gas contracts. Prior to
the implementation of the RCP, these futures and swap contracts were accounted
for as cash flow hedges. Since the RCP was implemented in January 2005, these
instruments no longer qualify for cash flow hedge accounting. As a result, we
reclassified a $29 million gain ($9 million, net of tax and minority interest)
to earnings because the hedged forecasted transactions are no longer probable.
Additionally, for the year ended December 31, 2005, we recorded an additional
$22 million gain associated with the increase in fair value of these
instruments. The total gain recognized from these instruments, $51 million
before considering tax effects and minority interest, is included in the total
Fuel costs mark-to-market at MCV on our Consolidated Statements of Income
(Loss). Because of the volatility of the natural gas market, the MCV Partnership
expects future earnings volatility on these contracts, since gains and losses
will be recorded each quarter. We expect almost all of these futures and swap
contracts to be realized during 2006 as the contracts settle, with the remainder
to be realized during 2007. For further details on the RCP, see Note 3,
Contingencies, "Other Consumers' Electric Utility Contingencies -- The Midland
Cogeneration Venture."

     The MCV Partnership also engages in cost mitigation activities to offset
fixed charges of operating the MCV Facility. These cost mitigation activities
may include the use of futures and options contracts to purchase and/or sell
natural gas in order to maximize the use of transportation and storage contracts
when they are not needed for operation of the MCV Facility. Although these cost
mitigation activities do serve to offset fixed monthly charges, these activities
are not considered a normal course of business for the MCV Partnership and do
not qualify as hedges. Therefore, the mark-to-market gains and losses from these
cost mitigation activities are recorded in earnings each quarter. At December
31, 2005, the MCV Partnership did not hold any futures or options for the
purpose of these cost mitigation activities.

     CMS ERM CONTRACTS: CMS ERM enters into and owns energy contracts as a part
of activities considered to be an integral part of CMS Energy's ongoing
operations. CMS ERM holds certain contracts for the future purchase and sale of
electricity and natural gas that will result in physical delivery of the
commodity at contractual prices. These forward contracts are generally long-term
in nature and are classified as non-trading.

                                      CMS-82
<PAGE>
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

CMS ERM also uses various financial instruments, including swaps, options, and
futures, to manage commodity price risks associated with its forward purchase
and sale contracts and with generation assets owned by CMS Energy or its
subsidiaries. These financial contracts are classified as trading activities.

     In accordance with SFAS No. 133, non-trading and trading contracts that
qualify as derivatives are recorded at fair value on our Consolidated Balance
Sheets. The resulting assets and liabilities are marked to market each quarter,
and changes in fair value are recorded in earnings as a component of Operating
Revenue. For trading contracts, these gains and losses are recorded net in
accordance with EITF Issue No. 02-03, which we adopted effective January 1,
2003. Contracts that do not meet the definition of a derivative are accounted
for as executory contracts (that is, on an accrual basis).

     DERIVATIVE CONTRACTS ASSOCIATED WITH EQUITY INVESTMENTS: At December 31,
2005, some of our equity method investees held:

     - interest rate contracts that hedged the risk associated with
       variable-rate debt, and

     - foreign exchange contracts that hedged the foreign currency risk
       associated with payments to be made under operating and maintenance
       service agreements.

     We record our proportionate share of the change in fair value of these
contracts in Accumulated other comprehensive loss if the contracts qualify for
cash flow hedge accounting; otherwise, we record our share in Earnings from
Equity Method Investees.

     FOREIGN EXCHANGE DERIVATIVES: At times, we use forward exchange and option
contracts to hedge the equity value relating to investments in foreign
operations. These contracts limit the risk from currency exchange rate movements
because gains and losses on such contracts offset losses and gains,
respectively, on the hedged investments. At December 31, 2005, we had no
outstanding foreign exchange contracts. However, the impact of previous hedges
on our investments in foreign operations is reflected in Accumulated other
comprehensive loss as a component of the foreign currency translation adjustment
on our Consolidated Balance Sheets. Gains or losses from the settlement of these
hedges are maintained in the foreign currency translation adjustment until we
sell or liquidate the hedged investments. At December 31, 2005, our total
foreign currency translation adjustment was a net loss of $313 million, which
included a net hedging loss of $26 million, net of tax, related to settled
contracts.

     CREDIT RISK: Our swaps, options, and forward contracts contain credit risk,
which is the risk that counterparties will fail to perform their contractual
obligations. We reduce this risk through established credit policies. For each
counterparty, we assess credit quality by using credit ratings, financial
condition, and other available information. We then establish a credit limit for
each counterparty based upon our evaluation of credit quality. We monitor the
degree to which we are exposed to potential loss under each contract and take
remedial action, if necessary.

     CMS ERM and the MCV Partnership enter into contracts primarily with
companies in the electric and gas industry. This industry concentration may have
an impact on our exposure to credit risk, either positively or negatively, based
on how these counterparties are affected by similar changes in economic,
weather, or other conditions. CMS ERM and the MCV Partnership typically use
industry-standard agreements that allow for netting positive and negative
exposures associated with the same counterparty, thereby reducing exposure.
These contracts also typically provide for the parties to demand adequate
assurance of future performance when there are reasonable grounds for doing so.

     The following table illustrates our exposure to potential losses as of
December 31, 2005, if each counterparty within this industry concentration
failed to perform its contractual obligations. This table includes contracts
accounted for as financial instruments. It does not include trade accounts
receivable, derivative contracts

                                      CMS-83
<PAGE>
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

that qualify for the normal purchases and sales exception under SFAS No. 133, or
other contracts that are not accounted for as derivatives.

<Table>
<Caption>

                                                                                 NET EXPOSURE       NET EXPOSURE
                                       EXPOSURE                                  FROM INVESTMENT    FROM INVESTMENT
                                        BEFORE         COLLATERAL     NET          GRADE             GRADE
                                       COLLATERAL(a)   HELD(b)       EXPOSURE    COMPANIES(c)       COMPANIES (%)
                                       ------------    ----------    --------    ---------------    ---------------
                                                                      (IN MILLIONS)
<S>                                    <C>             <C>           <C>         <C>                <C>
CMS ERM............................        $140           $  7         $133           $132                99
MCV Partnership....................         350            189          161            133                83
</Table>

-------------------------
(a)  Exposure is reflected net of payables or derivative liabilities if netting
     arrangements exist.

(b)  Collateral held includes cash and letters of credit received from
     counterparties.

(c)  The remaining balance of our net exposure was from independent natural gas
     producers/suppliers that do not have published credit ratings. Based on
     internal credit reviews, we believe that these counterparties are
     financially strong and creditworthy.

     Based on our credit policies, our current exposures, and our credit
reserves, we do not expect a material adverse effect on our financial position
or future earnings as a result of counterparty nonperformance.

7: RETIREMENT BENEFITS

     We provide retirement benefits to our employees under a number of different
plans, including:

     - non-contributory, defined benefit Pension Plan,

     - a cash balance pension plan for certain employees hired after June 30,
       2003,

     - a DCCP for employees hired on or after September 1, 2005,

     - benefits to certain management employees under SERP,

     - a defined contribution 401(k) Savings Plan,

     - benefits to a select group of management under EISP, and

     - health care and life insurance benefits under OPEB.

     Pension Plan: The Pension Plan includes funds for most of our current
employees, the employees of our subsidiaries, and Panhandle, a former
subsidiary. The Pension Plan's assets are not distinguishable by company.

     On September 1, 2005, we implemented the DCCP. The DCCP provides an
employer contribution of 5 percent of base pay to the existing Employees'
Savings Plan. No employee contribution is required in order to receive the
plan's employer contribution. All employees hired on and after September 1, 2005
participate in this plan as part of their retirement benefit program. Cash
balance pension plan participants also participate in the DCCP as of September
1, 2005. Additional pay credits under the cash balance pension plan were
discontinued as of that date. The DCCP cost for the period ended December 31,
2005 was less than $1 million.

     SERP: SERP benefits are paid from a trust established in 1988. SERP is not
a qualified plan under the Internal Revenue Code; SERP trust earnings are
taxable and trust assets are included in consolidated assets. Trust assets were
$66 million at December 31, 2005 and $67 million at December 31, 2004. The
assets are classified as Other non-current assets on our Consolidated Balance
Sheets. The ABO for SERP was $74 million at December 31, 2005 and $67 million at
December 31, 2004.

     401(k): The employer's match for the 401(k) Savings Plan, which was
suspended on September 1, 2002 resumed on January 1, 2005. The employer's match
is in CMS Energy Common Stock. On September 1, 2005,

                                      CMS-84
<PAGE>
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

employees enrolled in the company's 401(k) Savings Plan had their employer match
increased from 50 percent to 60 percent on eligible contributions up to the
first six percent of an employee's wages. The total 401(k) Savings Plan cost for
the period ended December 31, 2005 was $13 million.

     The MCV Partnership sponsors a defined contribution retirement plan
covering all employees. Under the terms of the plan, the MCV Partnership makes
contributions of either 5 or 10 percent of an employee's eligible annual
compensation dependent upon the employee's age. The MCV Partnership also
sponsors a 401(k) savings plan for employees. Contributions and costs for this
plan are based on matching an employee's savings up to a maximum level. Amounts
contributed under these plans were $1 million in 2005 and 2004.

     EISP: We implemented an EISP in 2002 to provide flexibility in separation
of employment by officers, a select group of management, or other highly
compensated employees. Terms of the plan may include payment of a lump sum,
payment of monthly benefits for life, payment of premium for continuation of
health care, or any other legally permissible term deemed to be in our best
interest to offer. The EISP expense was $1 million for the year ended December
31, 2005 and less than $1 million for the year ended December 31, 2004. The ABO
for the EISP was $4 million at December 31, 2005 and at December 31, 2004.

     OPEB: The OPEB plan covers all regular full-time employees covered by the
employee health care plan on a company-subsidized basis the day before they
retire from the company at age 55 or older and who have at least ten full years
of applicable continuous service. Regular full-time employees who qualify for a
disability retirement and have 15 years of applicable continuous service are
also eligible. Retiree health care costs at December 31, 2005 are based on the
assumption that costs would increase 10 percent in 2005. The rate of increase is
expected to be 10 percent for 2006. The rate of increase is expected to slow to
an estimated 5 percent by 2011 and thereafter.

     The MCV Partnership sponsors defined cost postretirement health care plans
that cover all full-time employees, except key management. Participants in the
postretirement health care plans become eligible for the benefits if they retire
on or after the attainment of age 65 or upon a qualified disability retirement,
or if they have 10 or more years of service and retire at age 55 or older. The
ABO of the MCV Partnership's postretirement plans was $5 million at December 31,
2005 and 2004. The MCV Partnership's net periodic postretirement health care
cost for 2005 and 2004 was less than $1 million.

     The health care cost trend rate assumption affects the estimated costs
recorded. A one percentage point change in the assumed health care cost trend
assumption would have the following effects:

<Table>
<Caption>
                                                                                       ONE
                                                                ONE PERCENTAGE      PERCENTAGE
                                                                POINT INCREASE    POINT DECREASE
                                                                --------------    --------------
                                                                         (IN MILLIONS)
<S>                                                             <C>               <C>
Effect on total service and interest cost component.........         $ 15             $ (13)
Effect on postretirement benefit obligation.................         $164             $(143)
</Table>

     We adopted SFAS No. 106, effective as of the beginning of 1992. Consumers
recorded a liability of $466 million for the accumulated transition obligation
and a corresponding regulatory asset for anticipated recovery in utility rates.
For additional details, see Note 1, Corporate Structure and Accounting Policies,
"Utility Regulation." The MPSC authorized recovery of the electric utility
portion of these costs in 1994 over 18 years and the gas utility portion in 1996
over 16 years.

     The measurement date for all CMS Energy plans is November 30 for 2005 and
2004, and December 31 for 2003. As a result of the measurement date change in
2004, we recorded a $2 million cumulative effect of change in accounting, net of
tax benefit, as a decrease to earnings. We also increased the amount of accrued
benefit cost on our Consolidated Balance Sheets by $4 million. The measurement
date for the MCV Partnership's plan is December 31 for 2005 and 2004.

                                      CMS-85
<PAGE>
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     Assumptions: The following table recaps the weighted-average assumptions
used in our retirement benefits plans to determine benefit obligations and net
periodic benefit cost:

<Table>
<Caption>
                                                      PENSION & SERP                  OPEB
                                                  -----------------------    -----------------------
                                                  2005     2004     2003     2005     2004     2003
                                                  ----     ----     ----     ----     ----     ----
<S>                                               <C>      <C>      <C>      <C>      <C>      <C>
Discount rate.................................    5.75%    6.00%    6.25%    5.75%    6.00%    6.25%
Expected long-term rate of return on plan
  assets(a)...................................    8.50%    8.75%    8.75%
  Union.......................................                               8.25%    8.75%    8.75%
  Non-Union...................................                               8.25%    6.00%    6.00%
Rate of compensation increase:
  Pension.....................................    4.00%    3.50%    3.25%
  SERP........................................    5.50%    5.50%    5.50%
</Table>

-------------------------
(a) We determine our long-term rate of return by considering historical market
    returns, the current and future economic environment, the capital market
    principles of risk and return, and the expert opinions of individuals and
    firms with financial market knowledge. We use the asset allocation of the
    portfolio to forecast the future expected total return of the portfolio. The
    goal is to determine a long-term rate of return that can be incorporated
    into the planning of future cash flow requirements in conjunction with the
    change in the liability. The use of forecasted returns for various classes
    of assets used to construct an expected return model is reviewed
    periodically for reasonableness and appropriateness.

     Costs: The following table recaps the costs incurred in our retirement
benefits plans:

<Table>
<Caption>
                                                                   PENSION & SERP
                                                                ---------------------
YEARS ENDED DECEMBER 31                                         2005    2004     2003
-----------------------                                         ----    ----     ----
                                                                    (IN MILLIONS)
<S>                                                             <C>     <C>      <C>
Service cost................................................    $ 44    $  37    $ 40
Interest expense............................................      83       79      79
Expected return on plan assets..............................     (97)    (109)    (81)
Curtailment credit..........................................      --       --      (2)
Settlement charge...........................................      --       --      84
Amortization of:
  Net loss..................................................      35       14       9
  Prior service cost........................................       6        6       7
                                                                ----    -----    ----
Net periodic pension cost...................................    $ 71    $  27    $136
                                                                ====    =====    ====
</Table>

<Table>
<Caption>
                                                                        OPEB
                                                                --------------------
YEARS ENDED DECEMBER 31                                         2005    2004    2003
-----------------------                                         ----    ----    ----
                                                                   (IN MILLIONS)
<S>                                                             <C>     <C>     <C>
Service cost................................................    $ 23    $ 19    $ 21
Interest expense............................................      61      58      66
Expected return on plan assets..............................     (54)    (48)    (42)
Curtailment credit..........................................      --      --      (8)
Amortization of:
  Net loss..................................................      20      10      19
  Prior service cost........................................      (9)     (9)     (7)
                                                                ----    ----    ----
Net periodic postretirement benefit cost....................    $ 41    $ 30    $ 49
                                                                ====    ====    ====
</Table>

                                      CMS-86
<PAGE>
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     Reconciliations:  The following table reconciles the funding of our
retirement benefits plans with our retirement benefits plans' liability:

<Table>
<Caption>
                                                      PENSION PLAN          SERP              OPEB
                                                    ----------------    ------------    ----------------
YEARS ENDED DECEMBER 31                              2005      2004     2005    2004     2005      2004
-----------------------                              ----      ----     ----    ----     ----      ----
                                                                       (IN MILLIONS)
<S>                                                 <C>       <C>       <C>     <C>     <C>       <C>
Benefit obligation at beginning of period.......    $1,328    $1,189    $ 83    $ 76    $1,073    $  871
Service cost....................................        42        35       2       2        23        19
Interest cost...................................        78        74       5       5        61        58
Plan amendment..................................        39        --       1      --       (19)       --
Actuarial loss..................................       146       138       4       3        47       166
Benefits paid...................................      (123)     (108)     (4)     (3)      (49)      (41)
                                                    ------    ------    ----    ----    ------    ------
Benefit obligation at end of period(a)..........     1,510     1,328      91      83     1,136     1,073
                                                    ------    ------    ----    ----    ------    ------
Plan assets at fair value at beginning of
  period........................................     1,040     1,067      --      --       654       618
Actual return on plan assets....................       101        81      --      --        45        28
Company contribution............................        --        --       4       3        63        48
Actual benefits paid............................      (123)     (108)     (4)     (3)      (48)      (40)
                                                    ------    ------    ----    ----    ------    ------
Plan assets at fair value at end of period......     1,018     1,040      --      --       714       654
                                                    ------    ------    ----    ----    ------    ------
Benefit obligation in excess of plan assets.....      (492)     (288)    (91)    (83)     (422)     (419)
Unrecognized net loss from experience different
  than assumed..................................       747       642       8       5       375       340
Unrecognized prior service cost (benefit).......        56        23       2       1      (113)     (103)
                                                    ------    ------    ----    ----    ------    ------
Net Balance Sheet Asset (Liability).............       311       377     (81)    (77)     (160)     (182)
Additional VEBA Contributions or Non-Trust
  Benefit Payments..............................        --        --      --      --        16        15
Minimum liability(b)............................      (481)     (419)     --      --        --        --
                                                    ------    ------    ----    ----    ------    ------
Total Net Balance Sheet Asset (Liability).......    $ (170)   $  (42)   $(81)   $(77)   $ (144)   $ (167)
                                                    ======    ======    ====    ====    ======    ======
</Table>

-------------------------
(a) The Medicare Prescription Drug, Improvement and Modernization Act of 2003
    was signed into law in December 2003. The Act establishes a prescription
    drug benefit under Medicare (Medicare Part D), and a federal subsidy, which
    is tax-exempt, to sponsors of retiree health care benefit plans that provide
    a benefit that is actuarially equivalent to Medicare Part D.

    Our plan is actuarially equivalent to Medicare Part D and we have
    incorporated, retroactively, the effects of the subsidy into our financial
    statements at June 30, 2004, in accordance with FASB Staff Position, No.
    SFAS 106-2. We remeasured our obligation at December 31, 2003 to incorporate
    the impact of the Act, which resulted in a reduction to the accumulated
    postretirement benefit obligation of $158 million. The implementation
    resulted in a reduction of OPEB cost of $24 million for 2005 and 2004. The
    reduction of $24 million includes $6 million for the year ended December 31,
    2005 and $7 million for the year ended December 31, 2004 in capitalized OPEB
    costs.

(b) The Pension Plan's ABO of $1.188 billion exceeded the value of the Pension
    Plan assets and net balance sheet asset at December 31, 2005. As a result,
    we recorded a minimum liability of $481 million. Consistent with MPSC
    guidance, Consumers recognized the cost of their minimum liability as a
    regulatory asset. Accordingly, our minimum liability includes an intangible
    asset of $56 million, an accumulated other comprehensive income adjustment
    of $17 million, net of tax, and a regulatory asset of $399 million. The ABO
    for the Pension Plan was $1.082 billion at December 31, 2004.

                                      CMS-87
<PAGE>
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     We remeasured our Pension and OPEB obligations at April 30, 2005 to
incorporate the effects of the collective bargaining agreement reached between
the Utility Workers Union of America and Consumers. The net periodic pension
cost increased $14 million for 2005 and OPEB benefits costs increased $3 million
for 2005.

     Plan Assets: The following table recaps the categories of plan assets in
our retirement benefits plans:

<Table>
<Caption>
                                                                   PENSION               OPEB
                                                                --------------      --------------
                                                                2005      2004      2005      2004
                                                                ----      ----      ----      ----
<S>                                                             <C>       <C>       <C>       <C>
Asset Category:
  Fixed Income..............................................     33%      34%        58%       45%
  Equity Securities:........................................     65%      61%        40%       54%
     CMS Energy Common Stock(a).............................     --        5%         1%        1%
  Alternative Strategy......................................      2%       --         1%       --
</Table>

-------------------------
(a)  At November 30, 2005, there were zero shares of CMS Energy Common Stock in
     the Pension Plan assets, and 143,200 shares in the OPEB plan assets with a
     fair value of $2 million. At November 30, 2004, there were 4,892,000 shares
     of CMS Energy Common Stock in the Pension Plan assets with a fair value of
     $50 million, and 493,000 shares in the OPEB plan assets with a fair value
     of $5 million.

     We contributed $63 million to our OPEB plan in 2005 and we plan to
contribute $63 million to our OPEB plan in 2006. We did not contribute to our
Pension Plan in 2005 and we plan to contribute $13 million to our Pension plan
in 2006.

     We have established a target asset allocation for our Pension Plan assets
of 60 percent equity, 30 percent fixed income, and 10 percent alternative
strategy investments to maximize the long-term return on plan assets, while
maintaining a prudent level of risk. The level of acceptable risk is a function
of the liabilities of the plan. Equity investments are diversified mostly across
the Standard & Poor's 500 Index, with lesser allocations to the Standard &
Poor's Mid Cap, the Small Cap Indexes and a Foreign Equity Index Fund.
Fixed-income investments are diversified across investment grade instruments of
both government and corporate issuers. Alternative strategies are diversified
across absolute return investment approaches and global tactical asset
allocation. Annual liability measurements, quarterly portfolio reviews, and
periodic asset/liability studies are used to evaluate the need for adjustments
to the portfolio allocation.

     We have established union and non-union VEBA trusts to fund our future
retiree health and life insurance benefits. These trusts are funded through the
ratemaking process for Consumers, and through direct contributions from the
non-utility subsidiaries. The equity portions of the union and non-union health
care VEBA trusts are invested in a Standard & Poor's 500 Index fund. The
fixed-income portion of the union health care VEBA trust is invested in domestic
investment grade taxable instruments. The fixed-income portion of the non-union
health care VEBA trust is invested in a diversified mix of domestic tax-exempt
securities. The investment selections of each VEBA are influenced by the tax
consequences, as well as the objective of generating asset returns that will
meet the medical and life insurance costs of retirees.

                                      CMS-88
<PAGE>
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     Benefit Payments: The expected benefit payments for each of the next five
years and the five-year period thereafter are as follows:

<Table>
<Caption>

                                                                PENSION    SERP    OPEB(a)
                                                                -------    ----    -------
                                                                      (IN MILLIONS)
<S>                                                             <C>        <C>     <C>
2006........................................................     $ 57      $ 4      $ 51
2007........................................................       59        4        54
2008........................................................       65        4        55
2009........................................................       76        4        57
2010........................................................       88        4        59
2011-2015...................................................      591       18       321
</Table>

-------------------------
(a)  OPEB benefit payments are net of employee contributions and expected
     Medicare Part D prescription drug subsidy payments.

8: ASSET RETIREMENT OBLIGATIONS

     SFAS NO. 143: This standard became effective January 2003. It requires
companies to record the fair value of the cost to remove assets at the end of
their useful life, if there is a legal obligation to remove them. We have legal
obligations to remove some of our assets, including our nuclear plants, at the
end of their useful lives. For Consumers, as required by SFAS No. 71, we account
for the implementation of this standard by recording regulatory assets and
liabilities instead of a cumulative effect of a change in accounting principle.

     The fair value of ARO liabilities has been calculated using an expected
present value technique. This technique reflects assumptions such as costs,
inflation, and profit margin that third parties would consider to assume the
settlement of the obligation. Fair value, to the extent possible, should include
a market risk premium for unforeseeable circumstances. No market risk premium
was included in our ARO fair value estimate since a reasonable estimate could
not be made. If a five percent market risk premium were assumed, our ARO
liability would increase by $25 million.

     If a reasonable estimate of fair value cannot be made in the period in
which the ARO is incurred, such as for assets with indeterminate lives, the
liability is to be recognized when a reasonable estimate of fair value can be
made. Generally, electric and gas transmission and distribution assets have
indeterminate lives. Retirement cash flows cannot be determined and there is a
low probability of a retirement date. Therefore, no liability has been recorded
for these assets or associated obligations related to potential future
abandonment. Also, no liability has been recorded for assets that have
insignificant cumulative disposal costs, such as substation batteries. The
measurement of the ARO liabilities for Palisades and Big Rock are based on
decommissioning studies that largely utilize third-party cost estimates.

     FASB INTERPRETATION NO. 47, ACCOUNTING FOR CONDITIONAL ASSET RETIREMENT
OBLIGATIONS: This Interpretation clarified the term "conditional asset
retirement obligation" as used in SFAS No. 143. The term refers to a legal
obligation to perform an asset retirement activity in which the timing and (or)
method of settlement are conditional on a future event. We determined that
abatement of asbestos included in our plant investments qualify as a conditional
ARO, as defined by FASB Interpretation No. 47. Our asbestos abatement ARO is
included in the tables within this Note. This Interpretation is effective for us
on December 31, 2005.

                                      CMS-89
<PAGE>
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     The following tables describe our assets that have legal obligations to be
removed at the end of their useful life:

<Table>
<Caption>
                                           IN SERVICE
            ARO DESCRIPTION                   DATE                LONG LIVED ASSETS               TRUST FUND
            ---------------                ----------             -----------------               ----------
                                                                                                 (IN MILLIONS)
<S>                                        <C>           <C>                                     <C>
December 31, 2005
Palisades-decommission plant site......        1972      Palisades nuclear plant                     $545
Big Rock-decommission plant site.......        1962      Big Rock nuclear plant                        10
JHCampbell intake/discharge water
  line.................................        1980      Plant intake/discharge water line             --
Closure of coal ash disposal areas.....     Various      Generating plants coal ash areas              --
Closure of wells at gas storage
  fields...............................     Various      Gas storage fields                            --
Indoor gas services equipment
  relocations..........................     Various      Gas meters located inside structures          --
Asbestos abatement.....................        1973      Electric and gas utility plant                --
Natural gas-fired power plant..........        1997      Gas fueled power plant                        --
Close gas treating plant and gas
  wells................................     Various      Gas transmission and storage                  --
</Table>

<Table>
<Caption>
                                                ARO                                                           ARO
                                             LIABILITY                                        CASH FLOW    LIABILITY
ARO DESCRIPTION                               1/1/04      INCURRED    SETTLED    ACCRETION    REVISIONS    12/31/04
---------------                              ---------    --------    -------    ---------    ---------    ---------
                                                                          (IN MILLIONS)
<S>                                          <C>          <C>         <C>        <C>          <C>          <C>
Palisades-decommission...................      $268         $--        $ --         $22          $60         $350
Big Rock-decommission....................        34          --         (40)         14           22           30
JHCampbell intake line...................        --          --          --          --           --           --
Coal ash disposal areas..................        53          --          (4)          5           --           54
Wells at gas storage fields..............         2          --          (1)         --           --            1
Indoor gas services relocations..........         1          --          --          --           --            1
Natural gas-fired power plant............         1          --          --          --           --            1
Close gas treating plant and gas wells...        --           1          --           1           --            2
                                               ----         ---        ----         ---          ---         ----
Total prior to FIN 47 adoption...........       359           1         (45)         42           82          439
Asbestos abatement (FIN 47)..............        31          --          --           2           --           33
                                               ----         ---        ----         ---          ---         ----
Total upon adoption of FIN 47............      $390         $ 1        $(45)        $44          $82         $472
                                               ====         ===        ====         ===          ===         ====
</Table>

<Table>
<Caption>
                                                ARO                                                           ARO
                                             LIABILITY                                        CASH FLOW    LIABILITY
ARO DESCRIPTION                              12/31/04     INCURRED    SETTLED    ACCRETION    REVISIONS    12/31/05
---------------                              ---------    --------    -------    ---------    ---------    ---------
                                                                          (IN MILLIONS)
<S>                                          <C>          <C>         <C>        <C>          <C>          <C>
Palisades-decommission...................      $350         $--        $ --         $25          $--         $375
Big Rock-decommission....................        30          --         (42)         15           24           27
JHCampbell intake line...................        --          --          --          --           --           --
Coal ash disposal areas..................        54          --          (5)          5           --           54
Wells at gas storage fields..............         1          --          --          --           --            1
Indoor gas services relocations..........         1          --          --          --           --            1
Natural gas-fired power plant............         1          --          --          --           --            1
Close gas treating plant and gas wells...         2          --          (1)         --           --            1
                                               ----         ---        ----         ---          ---         ----
Total prior to FIN 47 adoption...........       439          --         (48)         45           24          460
Asbestos abatement (FIN 47)..............        33          --          --           3           --           36
                                               ----         ---        ----         ---          ---         ----
Total upon adoption of FIN 47............      $472         $--        $(48)        $48          $24         $496
                                               ====         ===        ====         ===          ===         ====
</Table>

     The ARO liability at January 1, 2004 and December 31, 2004 in the preceding
tables reflect the ARO liability as if FASB Interpretation No. 47 had been in
effect at that time, as required by the Interpretation. Our financial statements
for those periods do not reflect the asbestos abatement ARO. For Consumers, as
required by SFAS No. 71, we accounted for the implementation of this
Interpretation by recording a regulatory asset instead of a cumulative effect of
a change in accounting principle. There was no effect on net income.

                                      CMS-90
<PAGE>
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     In October 2004, the MPSC initiated a generic proceeding to review SFAS No.
143, FERC Order No. 631, Accounting, Financial Reporting, and Rate Filing
Requirements for Asset Retirement Obligations, and related accounting and
ratemaking issues for MPSC-jurisdictional electric and gas utilities. Utilities
filed responses to the Order in March 2005; the MPSC Staff and intervenors filed
responses in May 2005. On December 5, 2005, the ALJ issued a proposal for
decision recommending that the MPSC dismiss the proceeding. Exceptions and
replies to exceptions have been filed. We consider the proceeding a
clarification of accounting and reporting issues that relate to all Michigan
utilities. We cannot predict the outcome of the proceeding.

9: INCOME TAXES

     CMS Energy and its subsidiaries file a consolidated federal income tax
return. Income taxes generally are allocated based on each company's separate
taxable income in accordance with the CMS Energy tax sharing agreement.

     We utilize deferred tax accounting for temporary differences. These occur
when there are differences between the book and tax carrying amounts of assets
and liabilities. ITC has been deferred and is being amortized over the estimated
service life of the related properties. We use ITC to reduce current income
taxes payable.

     AMT paid generally becomes a tax credit that we can carry forward
indefinitely to reduce regular tax liabilities in future periods when regular
taxes paid exceed the tax calculated for AMT. At December 31, 2005, we had AMT
credit carryforwards in the amount of $204 million that do not expire and tax
loss carryforwards in the amount of $1.239 billion that expire from 2021 through
2024. We do not believe that a valuation allowance is required, as we expect to
utilize the loss carryforward prior to its expiration. In addition, we had
general business credit carryforwards in the amount of $4 million and charitable
contribution carryforwards in the amount of $22 million that expire from 2006
through 2009, for which a partial valuation allowance has been provided.

     U.S. income taxes are not recorded on the undistributed earnings of foreign
subsidiaries that have been or are intended to be reinvested indefinitely. Upon
distribution, those earnings may be subject to both U.S. income taxes (adjusted
for foreign tax credits or deductions) and withholding taxes payable to various
foreign countries. Cumulative undistributed earnings of foreign subsidiaries for
which income taxes have not been provided totaled approximately $205 million at
December 31, 2005. It is impractical to estimate the amount of unrecognized
deferred income taxes or withholding taxes on these undistributed earnings.

     The American Jobs Creation Act (AJCA) of 2004 created a one-time
opportunity to receive a tax benefit for U.S. corporations that reinvest, in the
U.S., dividends received in a year (2005 for CMS Energy) from controlled foreign
corporations. During 2005, we repatriated $377 million of foreign earnings that
qualified for the tax benefit. The net effect of the repatriated earnings were
tax benefits of $45 million in 2005 and $21 million in 2004, which were recorded
in income from continuing operations.

                                      CMS-91
<PAGE>
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     The significant components of income tax expense (benefit) on continuing
operations consisted of:

<Table>
<Caption>
YEARS ENDED DECEMBER 31                                         2005       2004      2003
-----------------------                                         ----       ----      ----
                                                                      (IN MILLIONS)
<S>                                                             <C>        <C>       <C>
Current income taxes:
  Federal...................................................    $  76      $ --      $ (17)
  Federal income tax benefit of operating loss
     carryforwards..........................................      (70)       --         --
  State and local...........................................       (3)        3          1
  Foreign...................................................       26         9         17
                                                                -----      ----      -----
                                                                $  29      $ 12      $   1
Deferred income taxes:
  Federal...................................................    $(141)     $  8      $  54
  Federal tax benefit of American Jobs Creation Act of
     2004...................................................      (45)      (21)        --
  State.....................................................       --        (5)         4
  Foreign...................................................        2         6          5
                                                                -----      ----      -----
                                                                $(184)     $(12)     $  63
Deferred ITC, net...........................................      (13)       (5)        (6)
                                                                -----      ----      -----
Tax expense (benefit).......................................    $(168)     $ (5)     $  58
                                                                =====      ====      =====
</Table>

     Deferred tax assets and liabilities are recognized for the estimated future
tax effect of temporary differences between the tax basis of assets or
liabilities and the reported amounts in the financial statements. Deferred tax
assets and liabilities are classified as current or noncurrent according to the
classification of the related assets or liabilities. Deferred tax assets and
liabilities not related to assets or liabilities are classified according to the
expected reversal date of the temporary differences.

     The principal components of deferred tax assets (liabilities) recognized in
our Consolidated Balance Sheets are as follows:

<Table>
<Caption>
DECEMBER 31                                                      2005       2004
-----------                                                      ----       ----
                                                                  (IN MILLIONS)
<S>                                                             <C>        <C>
Property....................................................    $  (764)   $(1,150)
Securitized costs...........................................       (172)      (176)
Employee benefits...........................................        (67)       (64)
Gas inventories.............................................       (148)      (126)
Tax loss and credit carryforwards...........................        648        738
Valuation allowances........................................        (10)       (42)
SFAS No. 109 regulatory liabilities, net....................        159        152
Other, net..................................................          2        155
                                                                -------    -------
  Net deferred tax liabilities..............................    $  (352)   $  (513)
                                                                =======    =======
Deferred tax liabilities....................................    $(1,325)   $(1,742)
Deferred tax assets, net of valuation reserves..............        973      1,229
                                                                -------    -------
  Net deferred tax liabilities..............................    $  (352)   $  (513)
                                                                =======    =======
</Table>

     In August 2005, the IRS issued Revenue Ruling 2005-53 and regulations to
provide guidance with respect to the use of the "simplified service cost" method
of tax accounting. We use this tax accounting method, generally allowed by the
IRS under section 263A of the Internal Revenue Code, with respect to the
allocation of certain corporate overheads to the tax basis of self-constructed
utility assets. Under the IRS guidance, significant issues

                                      CMS-92
<PAGE>
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

with respect to the application of this method remain unresolved and subject to
dispute. However, the effect of the IRS's position may be to require CMS Energy
either (1) to repay a portion of previously received tax benefits, or (2) to add
back to taxable income, half in each of 2005 and 2006, a significant portion of
previously deducted overheads. The impact of this matter on future earnings,
cash flows, or our present NOL carryforwards remains uncertain, but could be
material. We have recorded a reduction in our NOL carryforwards of $359 million
in 2005, and a corresponding reduction in deferred taxes related to property, to
reflect the estimated 2005 effect of the new regulation.

     The actual income tax expense (benefit) on continuing operations differs
from the amount computed by applying the statutory federal tax rate of 35
percent to income before income taxes as follows:

<Table>
<Caption>
YEARS ENDED DECEMBER 31                                           2005       2004       2003
-----------------------                                           ----       ----       ----
                                                                         (IN MILLIONS)
<S>                                                               <C>        <C>        <C>
Income (loss) from continuing operations before income taxes
  Domestic..................................................      $(463)     $ 199      $ (74)
  Foreign...................................................        197        (77)        90
                                                                  -----      -----      -----
       Total................................................       (266)       122         16
Statutory federal income tax rate...........................       X 35%      X 35%      X 35%
                                                                  -----      -----      -----
Expected income tax expense (benefit).......................        (93)        42          6
Increase (decrease) in taxes from:
  Property differences......................................         15         13         18
  Income tax effect of foreign investments..................        (24)       (25)       (18)
  AJCA foreign dividends benefit............................        (45)       (21)        --
  ITC amortization..........................................         (4)        (6)        (6)
  State and local income taxes, net of federal benefit......         (2)        (1)        --
  Prior period accrual adjustments..........................         (1)        (5)        (1)
  Medicare Part D exempt income.............................         (6)        (6)        --
  Tax exempt income.........................................         (3)        (3)        (3)
  Tax contingency reserves..................................         (5)         5         --
  Valuation allowance.......................................         --         --         50
  Other, net................................................         --          2         12
                                                                  -----      -----      -----
Recorded income tax expense (benefit).......................      $(168)     $  (5)     $  58
                                                                  -----      -----      -----
Effective tax rate(a).......................................       63.2%      (4.1)%       (a)
                                                                  =====      =====      =====
</Table>

-------------------------
(a)  Because of the small size of the net income in 2003, the effective tax rate
     is not meaningful.

     On December 31, 2005, $25 million of general business credit carryforwards,
net of federal income tax, expired for which a full valuation allowance had been
provided. The net change in the deferred tax asset of $25 million was offset by
the $20 million reduction in the valuation allowance and reversal of unamortized
ITC, net of federal income tax, of $5 million.

     The amount of income taxes we pay is subject to ongoing audits by federal,
state and foreign tax authorities, which can result in proposed assessments. The
"simplified service cost method" described above is currently under audit by the
IRS. Our estimate for the potential outcome for any uncertain tax issue is
highly judgmental. We believe that our accrued tax liabilities at December 31,
2005 are adequate for all years.

                                      CMS-93
<PAGE>
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10: EXECUTIVE INCENTIVE COMPENSATION

     We provide a Performance Incentive Stock Plan (the Plan) to key employees
and non-employee directors or consultants based on their contributions to the
successful management of the company. The Plan has a 5-year term, expiring in
May 2009. The Plan includes the following types of awards:

     - restricted stock,

     - stock options,

     - stock appreciation rights,

     - phantom shares,

     - performance units, and

     - management stock purchases.

     Restricted shares of common stock are outstanding shares with full voting
and dividend rights. These awards vest 100 percent after three years and are
subject to achievement of specified levels of total shareholder return,
including a comparison to a peer group of companies. Some awards vest based
solely on continued employment. These awards are subject to forfeiture if
employment terminates before vesting. Restricted shares vest fully if control of
CMS Energy changes, as defined by the Plan.

     Stock options give the holder the right to purchase common stock at a given
price over an extended period of time. Stock appreciation rights give the holder
the right to receive common stock appreciation, defined as the excess of the
market price of the stock at the date of exercise over the grant date price. All
stock options and stock appreciation rights are valued at fair market price when
granted. All options and rights may be exercised upon grant, and expire up to 10
years and one month from the date of grant.

     Phantom shares are valued at the fair market price of common stock when
granted. They give the holder the right to receive the appreciation value of
common stock on one or more valuation dates, according to a specified vesting
schedule determined at the time of grant. These shares are subject to forfeiture
if employment terminates before vesting.

     Performance units have an initial value that is established at the time of
grant. Performance criteria are established at the time of grant and, depending
upon the extent to which they are met, will determine the value of the payout,
which may be in the form of cash, common stock, or a combination of both. These
units are subject to forfeiture if employment terminates.

     Select participants may elect to receive all or a portion of their
incentive payments under the Officer's Incentive Compensation Plan in the form
of cash, shares of restricted common stock, shares of restricted stock units, or
any combination of these. These participants may also receive awards of
additional restricted common stock or restricted stock units, provided the total
value of these additional grants does not exceed $2.5 million for any fiscal
year.

     Under the Plan, shares awarded or subject to options, phantom shares, and
performance units may not exceed 6 million shares from June 2004 through May
2009, nor may such grants or awards to any participant exceed 250,000 shares in
any fiscal year.

     Shares for which payment or exercise is in cash, as well as shares or
options that are forfeited, may be awarded or granted again under the Plan.

     Awards of up to 4,931,130 shares of CMS Energy Common Stock may be issued
at December 31, 2005. All grants awarded under this Plan in 2005 were in the
form of restricted stock.

                                      CMS-94
<PAGE>
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     The following table summarizes restricted stock and stock option activity:

<Table>
<Caption>
                                                        RESTRICTED STOCK            STOCK OPTIONS
                                                        ----------------    ------------------------------
                                                           NUMBER OF        NUMBER OF     WEIGHTED AVERAGE
CMS ENERGY COMMON STOCK                                      SHARES          OPTIONS       EXERCISE PRICE
-----------------------                                    ---------        ---------     ----------------
<S>                                                     <C>                 <C>           <C>
Outstanding at January 1, 2003......................         958,326         5,121,620         $27.18
  Granted...........................................         607,886         1,593,000         $ 6.35
  Shares Vested/Options Exercised...................         (80,425)           (8,000)        $ 8.12
  Forfeited or Expired..............................        (213,873)         (885,044)        $28.66
                                                           ---------        ----------         ------
Outstanding at December 31, 2003....................       1,271,914         5,821,576         $21.27
  Granted...........................................         525,310                --             --
  Shares Vested/Options Exercised...................        (142,699)         (600,000)        $ 6.67
  Forfeited or Expired..............................        (269,629)         (433,550)        $27.84
                                                           ---------        ----------         ------
Outstanding at December 31, 2004....................       1,384,896         4,788,026         $22.50
  Granted...........................................         551,560                --             --
  Shares Vested/Options Exercised...................        (254,400)         (232,000)        $ 6.81
  Forfeited or Expired..............................              --        (1,014,688)        $30.62
                                                           ---------        ----------         ------
Outstanding at December 31, 2005....................       1,682,056         3,541,338         $21.21
                                                           =========        ==========         ======
</Table>

     At December 31, 2005, 878,000 of the 1,682,056 shares of restricted stock
outstanding were subject to performance objectives.

     In December 2002, we adopted the fair value based method of accounting for
stock-based employee compensation under SFAS No. 123, as amended by SFAS No.
148. We elected to adopt the prospective method recognition provisions of this
Statement, which applies the recognition provisions to all awards granted,
modified, or settled after the beginning of the fiscal year that the recognition
provisions are first applied. Compensation expense for restricted stock was $4
million in 2005, $2 million in 2004 and $2 million in 2003. Compensation expense
for stock options was $5 million in 2003.

     The following table shows the weighted average grant date fair value of
restricted stock and stock options:

<Table>
<Caption>
YEARS ENDED DECEMBER 31                                          2005     2004     2003
-----------------------                                          ----     ----     ----
<S>                                                             <C>       <C>      <C>
WEIGHTED AVERAGE GRANT DATE FAIR VALUE
  Restricted Stock Granted..................................    $15.61    $9.38    $6.36
  Stock Options Granted.....................................        --(a)    --(a) $2.96
</Table>

-------------------------

(a)  There were no stock option grants during 2005 or 2004.

     We estimate the fair value of stock options using the Black-Scholes model.
We used the following assumptions in the Black-Scholes model:

<Table>
<Caption>

YEARS ENDED DECEMBER 31                                         2005(a)    2004(a)    2003
------------------------------------------------------------     ----       ----      -----
<S>                                                             <C>        <C>        <C>
CMS ENERGY COMMON STOCK OPTIONS
  Risk-free interest rate...................................       --         --       3.02%
  Expected stock price volatility...........................       --         --      55.46%
  Expected dividend rate....................................       --         --         --
  Expected option life (years)..............................       --         --        4.2
</Table>

-------------------------
(a)  There were no stock option grants during 2005 or 2004.

                                      CMS-95
<PAGE>
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     The following table summarizes our stock options outstanding at December
31, 2005:

<Table>
<Caption>
                                                  NUMBER OF OPTIONS    WEIGHTED AVERAGE    WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES                             OUTSTANDING        REMAINING LIFE      EXERCISE PRICE
------------------------                          -----------------    ----------------    ----------------
<S>                                               <C>                  <C>                 <C>
CMS ENERGY COMMON STOCK:
$6.35-$8.12...................................        1,312,500           7.42 years            $ 6.86
$17.00-$22.20.................................          819,420           5.43 years            $20.07
$22.69-$31.04.................................          637,914           4.38 years            $30.32
$34.80-$43.38.................................          771,504           2.91 years            $39.28
                                                      ---------           ----------            ------
$6.35-$43.38..................................        3,541,338           5.43 years            $21.21
                                                      =========           ==========            ======
</Table>

     The number of stock options exercisable was 3,541,338 at December 31, 2005,
4,778,488 at December 31, 2004, and 5,795,145 at December 31, 2003.

     SFAS NO. 123(R) AND SAB NO. 107, SHARE-BASED PAYMENT:  SFAS No. 123(R)
requires companies to use the fair value of employee stock options and similar
awards at the grant date to value the awards. Companies must expense this value
over the required service period of the awards. This Statement also clarifies
and expands SFAS No. 123's guidance in several areas, including measuring fair
value, classifying an award as equity or as a liability, and attributing
compensation cost to reporting periods including the timing of expense
recognition for share-based awards with terms that accelerate vesting upon
retirement. As a result of these clarifications, future compensation costs for
share-based awards with accelerated vesting provisions upon retirement will need
to be fully expensed by the period in which the employee becomes eligible to
retire. At December 31, 2005, unrecognized compensation cost for such
share-based awards held by retirement eligible employees was not material.

     SFAS No. 123(R) was effective for us on January 1, 2006. We elected to
adopt the modified prospective method recognition provisions of this Statement
instead of retrospective restatement. The modified prospective method applies
the recognition provisions to all awards granted or modified after the adoption
date of this Statement. We adopted the fair value method of accounting for
share-based awards effective December 2002. Therefore, SFAS No. 123(R) did not
have a significant impact on our results of operations when it became effective.

     The SEC issued SAB No. 107 to express the views of the staff regarding the
interaction between SFAS No. 123(R) and certain SEC rules and regulations. Also,
the SEC issued SAB No. 107 to provide the staff's views regarding the valuation
of share-based payments, including assumptions such as expected volatility and
expected term. We applied the additional guidance provided by SAB No. 107 upon
implementation of SFAS No. 123(R) with no impact on our results of operations.

11: LEASES

     Lessee:  We lease various assets, including service vehicles, railcars,
construction equipment, office furniture, and buildings. Most of our leases
contain options at the end of the initial lease term to purchase the asset at
fair value or renew the lease at fair rental value. In November 2003, we
exercised our purchase option under the capital lease agreement for our main
headquarters building in Jackson, Michigan.

                                      CMS-96
<PAGE>
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     Consumers is authorized by the MPSC to record both capital and operating
lease payments as operating expenses and recover the total costs from their
customers. The following table summarizes our capital and operating lease
expenses and sublease income:

<Table>
<Caption>
YEARS ENDED DECEMBER 31                                         2005       2004       2003
-----------------------                                         ----       ----       ----
                                                                      (IN MILLIONS)
<S>                                                             <C>        <C>        <C>
Capital lease expense(a)....................................    $14        $13        $17
Operating lease expense.....................................     18         14         14
Income from subleases.......................................     (2)        (1)        (1)
</Table>

-------------------------
(a)  Capital lease obligations totaled $59 million at December 31, 2005.

     Minimum annual rental commitments under our non-cancelable leases at
December 31, 2005 are:

<Table>
<Caption>

                                                                CAPITAL    FINANCE      OPERATING
                                                                LEASES     LEASES(b)    LEASES
                                                                -------    ---------    ---------
                                                                          (IN MILLIONS)
<S>                                                             <C>        <C>          <C>
2006........................................................      $14        $ 16         $ 21
2007........................................................       14          18           19
2008........................................................       12          20           19
2009........................................................       10          21           15
2010........................................................       10          18           12
2011 and thereafter.........................................       30         183           49
                                                                  ---        ----         ----
Total minimum lease payments(a).............................       90         276         $135
                                                                                          ====
Less imputed interest.......................................       31          --
                                                                  ---        ----
Present value of net minimum lease payments.................       59         276
Less current portion........................................       11          16
                                                                  ---        ----
Non-current portion.........................................      $48        $260
                                                                  ===        ====
</Table>

-------------------------

(a)  Minimum payments have not been reduced by minimum sublease rentals of $1
     million due in the future under noncancelable subleases.

(b)  In order to obtain permanent financing for the MCV Facility, the MCV
     Partnership entered into a sale and leaseback agreement with a lessor
     group, which includes the FMLP, for substantially all of the MCV
     Partnership's fixed assets. In accordance with SFAS No. 98, the MCV
     Partnership accounted for the transaction as a financing arrangement. At
     December 31, 2005, finance lease obligations totaled $276 million, which
     represents the third-party portion of the MCV Partnership's finance lease
     obligation. Total charges under the MCV Partnership's finance lease
     obligation were $97 million in 2005 and $105 million in 2004. For
     additional details on transactions with the MCV Partnership and the FMLP,
     see Note 3, Contingencies, "Other Consumers' Electric Utility
     Contingencies -- The Midland Cogeneration Venture."

     Lessor:  We have a 44 percent ownership interest in a 31-mile intrastate
pipeline that runs from Coldwater Township, Michigan to Hanover Township,
Michigan. We lease our interest in the pipeline through a direct finance lease.
The lease expires in October 2031, with an annual option to extend the lease.

     We sell power, through the Takoradi power plant located in the Republic of
Ghana, Africa, under a power purchase agreement with the Volta River Authority.
In accordance with SFAS No. 13, we account for this transaction as a direct
finance lease. The initial lease term of the agreement expires in 2025.

                                      CMS-97
<PAGE>
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     The following table summarizes the net investment in direct finance leases
at December 31, 2005:

<Table>
<Caption>
                                                              DIRECT FINANCE LEASES
                                                              ---------------------
                                                                  (IN MILLIONS)
<S>                                                           <C>
2006........................................................          $ 25
2007........................................................            25
2008........................................................            25
2009........................................................            24
2010........................................................            24
2011 and thereafter.........................................           352
                                                                      ----
Total minimum lease payments................................           475
Less unearned income........................................           364
                                                                      ----
Net investment in direct finance leases.....................           111
Less current portion........................................             1
                                                                      ----
Non-current portion.........................................          $110
                                                                      ====
</Table>

12: PROPERTY, PLANT, AND EQUIPMENT

     The following table is a summary of our property, plant, and equipment:

<Table>
<Caption>
                                                                  ESTIMATED
                                                                 DEPRECIABLE
DECEMBER 31                                                     LIFE IN YEARS     2005      2004
-----------                                                     -------------     ----      ----
                                                                                  (IN MILLIONS)
<S>                                                             <C>              <C>       <C>
Electric:
  Generation................................................       13-105        $3,487    $3,433
  Distribution..............................................        12-75         4,226     4,069
  Other.....................................................         7-50           404       384
  Capital leases(a).........................................                         87        81
Gas:
  Underground storage facilities(b).........................        30-65           262       255
  Transmission..............................................        15-75           416       367
  Distribution..............................................        40-75         2,141     2,057
  Other.....................................................         7-50           306       290
  Capital leases(a).........................................                         26        26
Enterprises:
  IPP.......................................................         3-40           813     3,099
  CMS Gas Transmission......................................         5-40           131       133
  CMS Electric and Gas......................................         2-30            99       257
  Other.....................................................         4-25            25        28
Other:......................................................         7-71            25        28
Construction work-in-progress...............................                        520       370
Less accumulated depreciation, depletion, and
  amortization(c)...........................................                      5,123     6,135
                                                                                 ------    ------
Net property, plant, and equipment(d)(e)....................                     $7,845    $8,742
                                                                                 ======    ======
</Table>

-------------------------
(a)  Capital leases presented in this table are gross amounts. Amortization of
     capital leases was $54 million in 2005 and $49 million in 2004. Capital
     lease additions were $12 million and capital lease retirements and
     adjustments were $7 million at December 31, 2005. Capital lease additions
     were $3 million and capital lease retirements and adjustments were $1
     million at December 31, 2004.

                                      CMS-98
<PAGE>
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(b)  Includes unrecoverable base natural gas in underground storage of $26
     million at December 31, 2005 and $26 million at December 31, 2004, which is
     not subject to depreciation.

(c)  At December 31, 2005, accumulated depreciation, depletion, and amortization
     is comprised of $4.804 billion from our public utility plant assets and
     $319 million from other plant assets. At December 31, 2004, accumulated
     depreciation, depletion, and amortization included $5.665 billion from
     public utility plant assets and $470 million from other plant assets.

(d)  At December 31, 2005, public utility plant additions were $450 million and
     public utility plant retirements, including other plant adjustments, were
     $64 million. At December 31, 2004, public utility plant additions were $547
     million and public utility plant retirements, including other plant
     adjustments, were $91 million.

(e)  Included in net property, plant and equipment are intangible assets related
     primarily to software development costs, consents, leasehold improvements,
     and rights of way. The estimated amortization lives for software
     development costs are seven and twelve years. The estimated amortization
     life for leasehold improvements is the life of the lease. Other intangible
     amortization lives range from 50 to 105 years.

     The following tables summarize our intangible assets:

<Table>
<Caption>
                                                                                              INTANGIBLE
                                                                              ACCUMULATED       ASSET,
DECEMBER 31, 2005                                               GROSS COST    AMORTIZATION       NET
-----------------                                               ----------    ------------    ----------
                                                                             (IN MILLIONS)
<S>                                                             <C>           <C>             <C>
Software development........................................       $200           $135           $ 65
Rights of way...............................................        103             29             74
Leasehold improvements......................................         19             14              5
Franchises and consents.....................................         19              9             10
Other intangibles...........................................         42             19             23
                                                                   ----           ----           ----
Total.......................................................       $383           $206           $177
                                                                   ====           ====           ====
</Table>

<Table>
<Caption>
                                                                                              INTANGIBLE
                                                                              ACCUMULATED       ASSET,
DECEMBER 31, 2004                                               GROSS COST    AMORTIZATION       NET
-----------------                                               ----------    ------------    ----------
                                                                             (IN MILLIONS)
<S>                                                             <C>           <C>             <C>
Software development........................................       $179           $117           $ 62
Rights of way...............................................         94             28             66
Leasehold improvements......................................         22             14              8
Franchises and consents.....................................         19              9             10
Other intangibles...........................................         64             25             39
                                                                   ----           ----           ----
Total.......................................................       $378           $193           $185
                                                                   ====           ====           ====
</Table>

     Pretax amortization expense related to these intangible assets was $21
million for the year ended December 31, 2005, $21 million for the year ended
December 31, 2004, and $21 million for the year ended December 31, 2003.
Amortization of intangible assets is forecasted to range between $13 million and
$24 million per year over the next five years.

13: EQUITY METHOD INVESTMENTS

     Where ownership is more than 20 percent but less than a majority, we
account for certain investments in other companies, partnerships, and joint
ventures by the equity method of accounting in accordance with APB Opinion No.
18. Net income from these investments included undistributed earnings of $17
million in 2005, $88 million in 2004, and $41 million in 2003.

                                      CMS-99
<PAGE>
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     The most significant of these investments are:

     - our 50 percent interest in Jorf Lasfar, and

     - our 40 percent interest in Taweelah.

     If any of our equity method investments have assets or income from
continuing operations exceeding 10 percent of our consolidated assets or income,
summarized financial data of that subsidiary must be presented in the footnotes.
If any of our equity method investments have assets or income from continuing
operations exceeding 20 percent of our consolidated assets or income, separate,
audited financial statements must be presented as an exhibit to our Form 10-K.

     At December 31, 2005, Jorf Lasfar exceeded the 10 percent threshold and no
equity method investments exceeded the 20 percent threshold. At December 31,
2004, Taweelah exceeded the 10 percent threshold and Jorf Lasfar exceeded both
the 10 percent and 20 percent thresholds.

     Summarized financial information for these equity method investments is as
follows:

Income Statement Data

<Table>
<Caption>

                                                                YEAR ENDED DECEMBER 31, 2005
                                                                -----------------------------
                                                                 JORF         ALL
                                                                LASFAR(a)    OTHERS    TOTAL
                                                                ---------    ------    ------
                                                                        (IN MILLIONS)
<S>                                                             <C>          <C>       <C>
Operating revenue...........................................      $508       $1,550    $2,058
Operating expenses..........................................       340        1,190     1,530
                                                                  ----       ------    ------
Operating income............................................       168          360       528
Other expense, net..........................................        56          187       243
                                                                  ----       ------    ------
Net income..................................................      $112       $  173    $  285
                                                                  ====       ======    ======
</Table>

<Table>
<Caption>

                                                                    YEAR ENDED DECEMBER 31, 2004
                                                              -----------------------------------------
                                                               JORF                     ALL
                                                              LASFAR(a)    TAWEELAH    OTHERS    TOTAL
                                                              ---------    --------    ------    ------
                                                                            (IN MILLIONS)
<S>                                                           <C>          <C>         <C>       <C>
Operating revenue.........................................      $461         $99       $1,448    $2,008
Operating expenses........................................       282          40        1,207     1,529
                                                                ----         ---       ------    ------
Operating income..........................................       179          59          241       479
Other expense, net........................................        53          23          140       216
                                                                ----         ---       ------    ------
Net income................................................      $126         $36       $  101    $  263
                                                                ====         ===       ======    ======
</Table>

<Table>
<Caption>

                                                             YEAR ENDED DECEMBER 31, 2003
                                      ---------------------------------------------------------------------------
                                       JORF                                                     ALL
                                      LASFAR(a)    FMLP(b)    TAWEELAH    SCP(c)    ATACAMA    OTHERS    TOTAL(d)
                                      ---------    -------    --------    ------    -------    ------    --------
                                                                     (IN MILLIONS)
<S>                                   <C>          <C>        <C>         <C>       <C>        <C>       <C>
Operating revenue.................      $369         $79        $99        $74       $182      $1,054     $1,857
Operating expenses................       191           4         38         18        144         932      1,327
                                        ----         ---        ---        ---       ----      ------     ------
Operating income..................       178          75         61         56         38         122        530
Other expense, net................        58          43         18         25         25          39        208
                                        ----         ---        ---        ---       ----      ------     ------
Net income........................      $120         $32        $43        $31       $ 13      $   83     $  322
                                        ====         ===        ===        ===       ====      ======     ======
</Table>

                                     CMS-100
<PAGE>
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Balance Sheet Data

<Table>
<Caption>

                                                                      DECEMBER 31, 2005
                                                                -----------------------------
                                                                 JORF         ALL
                                                                LASFAR(a)    OTHERS    TOTAL
                                                                ---------    ------    ------
                                                                        (IN MILLIONS)
<S>                                                             <C>          <C>       <C>
Assets
  Current assets............................................     $  264      $  554    $  818
  Property, plant and equipment, net........................         15       3,372     3,387
  Other assets..............................................      1,022         516     1,538
                                                                 ------      ------    ------
                                                                 $1,301      $4,442    $5,743
                                                                 ======      ======    ======

Liabilities
  Current liabilities.......................................     $  241      $  458    $  699
  Long-term debt and other non-current liabilities..........        441       2,914     3,355
Equity......................................................        619       1,070     1,689
                                                                 ------      ------    ------
                                                                 $1,301      $4,442    $5,743
                                                                 ======      ======    ======
</Table>

<Table>
<Caption>

                                                                          DECEMBER 31, 2004
                                                              -----------------------------------------
                                                               JORF                     ALL
                                                              LASFAR(a)    TAWEELAH    OTHERS    TOTAL
                                                              ---------    --------    ------    ------
<S>                                                           <C>          <C>         <C>       <C>
Assets
  Current assets..........................................     $  314        $122      $  554    $  990
  Property, plant and equipment, net......................         12         629       3,104     3,745
  Other assets............................................      1,088          --         910     1,998
                                                               ------        ----      ------    ------
                                                               $1,414        $751      $4,568    $6,733
                                                               ======        ====      ======    ======

Liabilities
  Current liabilities.....................................     $  234        $ 75      $  240    $  549
  Long-term debt and other non-current liabilities........        562         523       3,079     4,164
Equity....................................................        618         153       1,249     2,020
                                                               ------        ----      ------    ------
                                                               $1,414        $751      $4,568    $6,733
                                                               ======        ====      ======    ======
</Table>

-------------------------
(a)  Our investment in Jorf Lasfar was $310 million at December 31, 2005 and
     $309 million at December 31, 2004. Our share of net income from Jorf Lasfar
     was $56 million for the year ended December 31, 2005, $63 million for the
     year ended December 31, 2004, and $60 million for the year ended December
     31, 2003.

(b)  Under Revised FASB Interpretation No. 46, we are the primary beneficiary of
     the FMLP and have consolidated their assets, liabilities, and financial
     activities for the years ended December 31, 2005 and 2004.

(c)  In August 2004, we sold our investment in SCP.

(d)  For 2003, the MCV Partnership was accounted for as an equity method
     investment but their summarized financial information is not included in
     these tables. Such information is shown below.

     SUMMARIZED FINANCIAL INFORMATION OF SIGNIFICANT RELATED ENERGY
SUPPLIER:  For 2003, the MCV Partnership was accounted for as an equity method
investment. Consumers' 49 percent investment in the MCV Partnership was $419
million at December 31, 2003 and our share of net income was $29 million for the
year ended December 31, 2003. Consumers' 2003 obligation to purchase electric
capacity from the MCV Partnership

                                     CMS-101
<PAGE>
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

provided 15 percent of its owned and contracted electric generating capacity.
Summarized income statement information of the MCV Partnership follows:

<Table>
<Caption>
YEAR ENDED DECEMBER 31, 2003
----------------------------                                    (IN MILLIONS)
<S>                                                             <C>
Operating revenue(a)........................................         $584
Operating expenses..........................................          416
                                                                     ----
Operating income............................................          168
Other expense, net..........................................          108
                                                                     ----
Net Income(b)...............................................         $ 60
                                                                     ====
</Table>

-------------------------
(a)  Revenue from Consumers totaled $514 million in 2003.

(b)  Consumers' share of net income was $29 million for the year ended December
     31, 2003.

     The FMLP is the sole beneficiary of a trust that is the lessor in a
long-term direct finance lease with the MCV Partnership. For the year ended
December 31, 2003, the FMLP recorded earnings of $32 million related to the
direct finance lease.

14: JOINTLY OWNED REGULATED UTILITY FACILITIES

     We have investments in jointly owned regulated utility facilities as shown
in the following table:

<Table>
<Caption>

                                                                                            CONSTRUCTION
                                                                NET         ACCUMULATED       WORK IN
                                               OWNERSHIP    INVESTMENT(a)   DEPRECIATION      PROGRESS
                                                SHARE       ------------    ------------    ------------
DECEMBER 31                                    (PERCENT)    2005    2004    2005    2004    2005    2004
-------------------------------------------    ---------    ----    ----    ----    ----    ----    ----
                                                                     (IN MILLIONS)
<S>                                            <C>          <C>     <C>     <C>     <C>     <C>     <C>
Campbell Unit 3............................        93.3     $270    $284    $354    $339    $258    $158
Ludington..................................        51.0       72      79      92      91       1      --
Distribution...............................     Various      100      77      45      33       9       6
</Table>

-------------------------
(a)  Net investment is the amount of utility plant in service less accumulated
     depreciation.

     The direct expenses of the jointly owned plants are included in operating
expenses. Operation, maintenance, and other expenses of these jointly owned
utility facilities are shared in proportion to each participant's undivided
ownership interest. We are required to provide only our share of financing for
the jointly owned utility facilities.

15: REPORTABLE SEGMENTS

     Our reportable segments consist of business units organized and managed by
their products and services. We evaluate performance based upon the net income
of each segment. We operate principally in three reportable segments: electric
utility, gas utility, and enterprises.

     The electric utility segment consists of regulated activities associated
with the generation and distribution of electricity in the state of Michigan
through our subsidiary, Consumers. The gas utility segment consists of regulated
activities associated with the transportation, storage, and distribution of
natural gas in the state of Michigan through our subsidiary, Consumers. The
enterprises segment consists of:

     - investing in, acquiring, developing, constructing, managing, and
       operating non-utility power generation plants, electric distribution
       assets, and natural gas facilities in the United States and abroad, and

     - providing gas, oil, and electric marketing services to energy users.

     Accounting policies of our segments are the same as we describe in the
summary of significant accounting policies. Our financial statements reflect the
assets, liabilities, revenues, and expenses directly related to the

                                     CMS-102
<PAGE>
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

individual segments where it is appropriate. We allocate accounts between the
segments where common accounts are attributable to more than one segment. The
allocations are based on certain measures of business activities, such as
revenue, labor dollars, customers, other operation and maintenance expense,
construction expense, leased property, taxes or functional surveys. For example,
customer receivables are allocated based on revenue. Pension provisions are
allocated based on labor dollars.

     We account for inter-segment sales and transfers at current market prices
and eliminate them in consolidated net income (loss) by segment. The "Other"
segment includes corporate interest and other, discontinued operations, and the
cumulative effect of accounting changes. The following tables show our financial
information by reportable segment:

<Table>
<Caption>
                  YEARS ENDED DECEMBER 31                        2005       2004         2003
                  -----------------------                        ----       ----         ----
                                                                         (IN MILLIONS)
<S>                                                             <C>        <C>          <C>
Operating Revenues
  Electric utility..........................................    $ 2,695    $ 2,583      $ 2,583
  Gas utility...............................................      2,483      2,081        1,845
  Enterprises...............................................      1,110        808        1,085
                                                                -------    -------      -------
                                                                $ 6,288    $ 5,472      $ 5,513
                                                                =======    =======      =======
Earnings from Equity Method Investees
  Enterprises...............................................    $   124    $   113      $   164
  Other.....................................................          1          2           --
                                                                -------    -------      -------
                                                                $   125    $   115      $   164
                                                                =======    =======      =======
Depreciation, Depletion, and Amortization
  Electric utility..........................................    $   292    $   189      $   247
  Gas utility...............................................        117        112          128
  Enterprises...............................................        115        129           52
  Other.....................................................          1          1            1
                                                                -------    -------      -------
                                                                $   525    $   431      $   428
                                                                =======    =======      =======
Interest Charges
  Electric utility..........................................    $   132    $   203      $   164
  Gas utility...............................................         68         64           51
  Enterprises...............................................         76         87           37
  Other.....................................................        208        275          329
                                                                -------    -------      -------
                                                                $   484    $   629      $   581
                                                                =======    =======      =======
Income Tax Expense (Benefit)
  Electric utility..........................................    $    85    $   120      $    90
  Gas utility...............................................         39         40           35
  Enterprises...............................................       (176)       (46)          14
  Other.....................................................       (116)      (119)         (81)
                                                                -------    -------      -------
                                                                $  (168)   $    (5)     $    58
                                                                =======    =======      =======
Net Income (Loss) Available to Common Stockholders
  Electric utility..........................................    $   153    $   223      $   167
  Gas utility...............................................         48         71           38
  Enterprises...............................................       (142)        19            8
  Other.....................................................       (153)      (203)        (257)
                                                                -------    -------      -------
                                                                $   (94)   $   110      $   (44)
                                                                =======    =======      =======
</Table>

                                     CMS-103
<PAGE>
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

<Table>
<Caption>
                  YEARS ENDED DECEMBER 31                        2005       2004         2003
                  -----------------------                        ----       ----         ----
                                                                         (IN MILLIONS)
<S>                                                             <C>        <C>          <C>
Investments in Equity Method Investees
  Enterprises...............................................    $   712    $   729      $ 1,367
  Other.....................................................         13         23           23
                                                                -------    -------      -------
                                                                $   725    $   752      $ 1,390
                                                                =======    =======      =======
Total Assets
  Electric utility(a).......................................    $ 7,743    $ 7,289      $ 6,831
  Gas utility(a)............................................      3,600      3,187        2,983
  Enterprises...............................................      4,130      4,980        3,670
  Other.....................................................        547        416          354
                                                                -------    -------      -------
                                                                $16,020    $15,872      $13,838
                                                                =======    =======      =======
Capital Expenditures(b)
  Electric utility..........................................    $   384    $   360      $   310
  Gas utility...............................................        168        137          135
  Enterprises...............................................         50         37           49
  Other.....................................................          3          1           --
                                                                -------    -------      -------
                                                                $   605    $   535      $   494
                                                                =======    =======      =======
</Table>

Geographic Areas(c)

<Table>
<Caption>
                                                                 2005       2004       2003
                                                                 ----       ----       ----
                                                                        (IN MILLIONS)
<S>                                                             <C>        <C>        <C>
United States
  Operating Revenue.........................................    $ 5,894    $ 5,163    $ 5,222
  Operating Income (Loss)...................................       (461)       586        511
  Total Assets..............................................    $14,654    $14,419    $12,372
International
  Operating Revenue.........................................    $   394    $   309    $   291
  Operating Income..........................................        187          7         84
  Total Assets..............................................    $ 1,366    $ 1,453    $ 1,466
</Table>

-------------------------
(a)  Amounts includes a portion of Consumers' other common assets attributable
     to both the electric and gas utility businesses.

(b)  Amounts include electric restructuring implementation plan, purchase of
     nuclear fuel, and capital lease additions. Amounts also include a portion
     of Consumers' capital expenditures for plant and equipment attributable to
     both the electric and gas utility businesses.

(c)  Revenues are based on the country location of customers.

16: CONSOLIDATION OF VARIABLE INTEREST ENTITIES

     We are the primary beneficiary of both the MCV Partnership and the FMLP. We
have a 49 percent partnership interest in the MCV Partnership and a 46.4 percent
partnership interest in the FMLP. Consumers is the primary purchaser of power
from the MCV Partnership through a long-term power purchase agreement. The FMLP
holds a 75.5 percent lessor interest in the MCV Facility, which results in
Consumers holding a 35 percent lessor interest in the MCV Facility.
Collectively, these interests make us the primary beneficiary of these entities.
Therefore, we consolidated these partnerships into our consolidated financial
statements as of and for the years ended December 31, 2005 and December 31,
2004.

                                     CMS-104
<PAGE>
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     These partnerships have third-party obligations totaling $482 million at
December 31, 2005 and $582 million at December 31, 2004. Property, plant, and
equipment serving as collateral for these obligations has a carrying value of
$224 million at December 31, 2005 and $1.426 billion at December 31, 2004. The
creditors of these partnerships do not have recourse to the general credit of
CMS Energy.

     At December 31, 2005, the MCV Partnership had total assets of $1.318
billion and a net loss of $917 million for the year. At December 31, 2004, the
MCV Partnership had total assets of $1.980 billion and a net loss of $24 million
for the year.

     We are the primary beneficiary of three other variable interest entities.
We have 50 percent partnership interests each in the T.E.S. Filer City Station
Limited Partnership, the Grayling Generating Station Limited Partnership, and
the Genesee Power Station Limited Partnership. Additionally, we have operating
and management contracts and are the primary purchaser of power from each
partnership through long-term power purchase agreements. Collectively, these
interests make us the primary beneficiary of these entities. Therefore, we
consolidated these partnerships into our consolidated financial statements for
all periods presented. These partnerships have third-party obligations totaling
$108 million at December 31, 2005 and $116 million at December 31, 2004.
Property, plant, and equipment serving as collateral for these obligations has a
carrying value of $163 million at December 31, 2005 and $168 million at December
31, 2004. Other than through outstanding letters of credit and guarantees of $5
million, the creditors of these partnerships do not have recourse to the general
credit of CMS Energy.

     Additionally, we hold interests in variable interest entities in which we
are not the primary beneficiary. The following chart details our involvement in
these entities at December 31, 2005:

<Table>
<Caption>
                                                                          INVESTMENT        OPERATING         TOTAL
NAME                     NATURE OF THE                    INVOLVEMENT       BALANCE       AGREEMENT WITH    GENERATING
(OWNERSHIP INTEREST)        ENTITY          COUNTRY          DATE        (IN MILLIONS)      CMS ENERGY       CAPACITY
--------------------     -------------      -------       -----------    -------------    --------------    ----------
<S>                      <C>              <C>             <C>            <C>              <C>               <C>
Taweelah (40%)           Generator        United Arab        1999            $ 78              Yes             777 MW
                                          Emirates
Jubail (25%)             Generator        Saudi Arabia       2001               2              Yes             250 MW
Shuweihat (20%)          Generator        United Arab        2001              47              Yes           1,500 MW
                                          Emirates
                                                                             ----                            --------
Total                                                                        $127                            2,527 MW
                                                                             ====                            ========
</Table>

     Our maximum exposure to loss through our interests in these variable
interest entities is limited to our investment balance of $127 million, and
letters of credit, guarantees, and indemnities relating to Taweelah and
Shuweihat totaling $45 million.

                                     CMS-105
<PAGE>
                             CMS ENERGY CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

17: QUARTERLY FINANCIAL AND COMMON STOCK INFORMATION (UNAUDITED)

<Table>
<Caption>
                                                                                  2005
                                                               ------------------------------------------
QUARTERS ENDED                                                 MARCH 31    JUNE 30    SEPT. 30    DEC. 31
--------------                                                 --------    -------    --------    -------
                                                                (IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S>                                                            <C>         <C>        <C>         <C>
Operating revenue..........................................     $1,845     $1,230      $1,307     $1,906
Operating income (loss)....................................        451         95        (804)       (16)
Income (loss) from continuing operations...................        152         30        (263)       (17)
Income from discontinued operations(a).....................         --         --          --         14
Net income (loss)..........................................        152         30        (263)        (3)
Preferred dividends........................................          2          3           2          3
Net income (loss) available to common stockholders.........        150         27        (265)        (6)
Income (loss) from continuing operations per average
  common share -- basic....................................       0.77       0.12       (1.21)     (0.09)
Income (loss) from continuing operations per average
  common share -- diluted..................................       0.74       0.12       (1.21)     (0.09)
Basic earnings (loss) per average common share(b)..........       0.77       0.12       (1.21)     (0.03)
Diluted earnings (loss) per average common share(b)........       0.74       0.12       (1.21)     (0.03)
Common stock prices(c)
  High.....................................................      13.38      15.16       16.71      16.48
  Low......................................................       9.81      12.56       14.98      13.39
</Table>

<Table>
-------------------------
                                                                                  2004
                                                               ------------------------------------------
QUARTERS ENDED                                                 MARCH 31    JUNE 30    SEPT. 30    DEC. 31
-----------------------------------------------------------    --------    -------    --------    -------
                                                                (IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S>                                                            <C>         <C>        <C>         <C>
Operating revenue..........................................     $1,754     $1,093      $1,063     $1,562
Operating income...........................................        145        148         158        142
Income (loss) from continuing operations...................         (2)        19          51         59
Income (loss) from discontinued operations(a)..............         (2)        --           8        (10)
Cumulative effect of change in accounting(a)...............         (2)        --          --         --
Net income (loss)..........................................         (6)        19          59         49
Preferred dividends........................................          3          3           3          2
Net income (loss) available to common stockholders.........         (9)        16          56         47
Income (loss) from continuing operations per average common
  share -- basic...........................................      (0.04)      0.10        0.30       0.30
Income (loss) from continuing operations per average common
  share -- diluted.........................................      (0.04)      0.10        0.29       0.29
Basic earnings (loss) per average common share(b)..........      (0.06)      0.10        0.35       0.25
Diluted earnings (loss) per average common share(b)........      (0.06)      0.10        0.34       0.24
Common stock prices(c)
  High.....................................................       9.51       9.32        9.73      10.53
  Low......................................................       8.36       7.90        8.59       8.93
</Table>

-------------------------
(a)  Net of tax.

(b)  Sum of the quarters may not equal the annual earnings per share due to
     changes in shares outstanding.

(c)  Based on New York Stock Exchange -- Composite transactions.

                                     CMS-106
<PAGE>

            REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of CMS Energy Corporation

     We have audited the accompanying consolidated balance sheets of CMS Energy
Corporation (a Michigan Corporation) as of December 31, 2005 and 2004, and the
related consolidated statements of income (loss), common stockholders' equity,
and cash flows for each of the three years in the period ended December 31,
2005. Our audits also included the financial statement schedule listed in the
Index at Item 15(a)(2). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits. We did
not audit the financial statements of Midland Cogeneration Venture Limited
Partnership, a 49% owned variable interest entity which has been consolidated in
2005 and 2004 and accounted for under the equity method of accounting in 2003.
We also did not audit the financial statements of Jorf Lasfar Energy Company
S.C.A. (which represents an investment accounted for under the equity method of
accounting), as of December 31, 2004 and for each of the two years in the period
ended December 31, 2004. Those statements were audited by other auditors whose
reports have been furnished to us, and our opinion on the consolidated financial
statements, insofar as it relates to the amounts included for the periods
indicated above for Midland Cogeneration Venture Limited Partnership and Jorf
Lasfar Energy Company S.C.A., respectively, is based solely on the reports of
the other auditors.

     We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits and the reports of other auditors provide a reasonable basis for our
opinion.

     In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of CMS Energy Corporation at December 31,
2005 and 2004, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 2005, in
conformity with U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.

     As discussed in Note 8 to the consolidated financial statements, in 2005,
the Company adopted Financial Accounting Standards Board (FASB) interpretation
No. 47, "Accounting for Conditional Asset Retirement Obligations". As discussed
in Note 16 to the consolidated financial statements, in 2004, the Company
adopted Revised FASB Interpretation No. 46, "Consolidation of Variable Interest
Entities". In addition, as discussed in Note 7 to the consolidated financial
statements, in 2004, the Company changed its measurement date for all CMS Energy
Corporation pension and postretirement benefit plans. As discussed in Notes 6
and 8 to the consolidated financial statements, in 2003, the Company adopted the
provisions of EITF Issue No. 02-03, "Recognition and Reporting of Gains and
Losses on Energy Trading Contracts" and of Statement of Financial Accounting
Standards (SFAS) No. 143, "Accounting for Asset Retirement Obligations".

     We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of CMS
Energy Corporation's internal control over financial reporting as of December
31, 2005, based on criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated February 22, 2006 expressed an unqualified opinion on
management's assessment of the effectiveness of the Company's internal control
over financial reporting and an adverse opinion on the effectiveness of the
Company's internal control over financial reporting because of the existence of
a material weakness.

                                          /s/ Ernst & Young LLP

Detroit, Michigan
February 22, 2006

                                     CMS-107
<PAGE>

            REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Partners and the Management Committee of
Midland Cogeneration Venture Limited Partnership:

     We have completed integrated audits of Midland Cogeneration Venture Limited
Partnership's 2005 and 2004 consolidated financial statements and of its
internal control over financial reporting as of December 31, 2005 and an audit
of its 2003 consolidated financial statements in accordance with the standards
of the Public Company Accounting Oversight Board (United States). Our opinions,
based on our audits, are presented below.

CONSOLIDATED FINANCIAL STATEMENTS

     In our opinion, the consolidated financial statements listed in the index
appearing under Item 15(a)(1) present fairly, in all material respects, the
financial position of Midland Cogeneration Venture Limited Partnership (a
Michigan Limited Partnership) and its subsidiaries at December 31, 2005 and
2004, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2005 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit of financial statements includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

INTERNAL CONTROL OVER FINANCIAL REPORTING

     Also, in our opinion, management's assessment, included in Management's
Report on Internal Control Over Financial Reporting appearing under Item 9(A),
that the Partnership maintained effective internal control over financial
reporting as of December 31, 2005 based on criteria established in Internal
Control -- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), is fairly stated, in all
material respects, based on those criteria. Furthermore, in our opinion, the
Partnership maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2005, based on criteria established
in Internal Control -- Integrated Framework issued by the COSO. The
Partnership's management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express
opinions on management's assessment and on the effectiveness of the
Partnership's internal control over financial reporting based on our audit. We
conducted our audit of internal control over financial reporting in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. An audit of internal control
over financial reporting includes obtaining an understanding of internal control
over financial reporting, evaluating management's assessment, testing and
evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we consider necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinions.

     A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable

                                     CMS-108
<PAGE>

assurance regarding prevention or timely detection of unauthorized acquisition,
use, or disposition of the company's assets that could have a material effect on
the financial statements.

     Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.

                                          /s/ PricewaterhouseCoopers LLP

                                          Detroit, Michigan
                                          February 20, 2006

                                     CMS-109
<PAGE>

                         REPORT OF INDEPENDENT AUDITORS

To the Management Committee
and Shareholders of Jorf Lasfar
ENERGY COMPANY S.C.A. (JLEC)
B.P. 99 -- Sidi Bouzid
El Jadida, Morocco

     We have audited the balance sheet of Jorf Lasfar Energy Company S.C.A. (the
Company) as of December 31, 2005 and the related statements of income,
shareholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The financial statements of Jorf Lasfar Energy Company S.C.A. for the
year ended December 31, 2004 and 2003 were audited by other auditors whose
report dated February 11, 2005, expressed an unqualified opinion on those
statements.

     We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. We were not engaged to perform an audit of
the Company's internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.

     In our opinion, the 2005 financial statements referred to above present
fairly, in all material respects, the financial position of Jorf Lasfar Energy
Company SCA at December 31, 2005, and the results of its operations and its cash
flows for the year then ended in conformity with accounting principles generally
accepted in the United States.

                                          /s/ ERNST & YOUNG

Casablanca, February 10th, 2006

                                     CMS-110
<PAGE>

                         REPORT OF INDEPENDENT AUDITORS

To the Management Committee
and Stockholders of Jorf Lasfar
Energy Company S.C.A.
B.P. 99 Sidi Bouzid
El Jadida

     We have audited the accompanying balance sheets of Jorf Lasfar Energy
Company S.C.A. (the "Company") as of December 31, 2004, 2003 and 2002, and the
related statements of income, of stockholders' equity and of cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

     We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States of America). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statements presentation. We believe that our
audits provide a reasonable basis for our opinion.

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Jorf Lasfar Energy Company
S.C.A. at December 31, 2004, 2003 and 2002, and the results of its operations
and its cash flows for the years then ended, in conformity with accounting
principles generally accepted in the United States of America.

/s/ Price Waterhouse

Price Waterhouse
Casablanca, Morocco,
February 11, 2005

                                     CMS-111
<PAGE>

                                                          CMS Energy Corporation

                      (THIS PAGE INTENTIONALLY LEFT BLANK)

                                     CMS-112
<PAGE>

[CONSUMERS ENERGY LOGO]

                     2005 CONSOLIDATED FINANCIAL STATEMENTS

                                       CE-1
<PAGE>

                            CONSUMERS ENERGY COMPANY

                         SELECTED FINANCIAL INFORMATION

<Table>
<Caption>
                                                             2005      2004      2003     2002     2001
                                                             ----      ----      ----     ----     ----
<S>                                                  <C>    <C>       <C>       <C>       <C>      <C>
Operating revenue (in millions)..................    ($)     5,232     4,711     4,435    4,169    3,976
Earnings from equity method investees (in
  millions)......................................    ($)         1         1        42       53       38
Income (loss) before cumulative effect of change
  in accounting principle (in millions)..........    ($)       (96)      280       196      363      199
Net income (loss) (in millions)(a)...............    ($)       (96)      279       196      381      188
Net income (loss) available to common stockholder
  (in millions)..................................    ($)       (98)      277       194      335      145
Cash from operations (in millions)...............    ($)       687       640         5      760      518
Capital expenditures, excluding capital lease
  additions (in millions)........................    ($)       572       508       486      559      745
Total assets (in millions)(b)....................    ($)    13,157    12,811    10,745    9,598    9,191
Long-term debt, excluding current portion (in
  millions)(b)...................................    ($)     4,303     4,000     3,583    2,442    2,472
Long-term debt -- related parties, excluding
  current portion (in millions)(c)...............    ($)        --       326       506       --       --
Non-current portion of capital leases (in
  millions)......................................    ($)       308       315        58      116       72
Total preferred stock (in millions)..............    ($)        44        44        44       44       44
Total Trust Preferred Securities (in
  millions)(c)...................................    ($)        --        --        --      490      520
Number of preferred shareholders at year-end.....            1,823     1,931     2,032    2,132    2,220
Book value per common share at year-end..........    ($)     33.03     28.68     24.51    22.46    22.81
Number of full-time equivalent employees at
  year-end Consumers.............................            8,114     8,050     7,947    8,311    8,405
  Michigan Gas Storage(d)........................               --        --        --       --       62
ELECTRIC STATISTICS
  Sales (billions of kWh)........................               43        40        39       39       40
  Customers (in thousands).......................            1,789     1,772     1,754    1,734    1,712
  Average sales rate per kWh.....................    (c)      6.73      6.88      6.91     6.88     6.65
GAS UTILITY STATISTICS
  Sales and transportation deliveries (bcf)......              350       385       380      376      367
  Customers (in thousands)(e)....................            1,708     1,691     1,671    1,652    1,630
  Average sales rate per mcf.....................    ($)      9.61      8.04      6.72     5.67     5.34
</Table>

-------------------------
(a)  See Notes 1 and 3 in the notes to the consolidated financial statements.

(b)  Under revised FASB Interpretation No. 46, we are the primary beneficiary of
     the MCV Partnership and the FMLP. As a result, we have consolidated their
     assets, liabilities and activities into our financial statements as of and
     for the years ended December 31, 2005 and 2004. These partnerships had
     third party obligations totaling $482 million at December 31, 2005 and $582
     million at December 31, 2004. Property, plant and equipment serving as
     collateral for these obligations had a carrying value of $224 million at
     December 31, 2005 and $1.426 billion at December 31, 2004.

(c)  Effective December 31, 2003, Trust Preferred Securities are classified on
     the balance sheets as Long-term debt -- related parties.

(d)  Effective November 2002, Michigan Gas Storage Company was merged into
     Consumers.

(e)  Excludes off-system transportation customers.

                                       CE-2
<PAGE>

                            CONSUMERS ENERGY COMPANY

                      MANAGEMENT'S DISCUSSION AND ANALYSIS

     In this MD&A, Consumers Energy, which includes Consumers Energy Company and
all of its subsidiaries, is at times referred to in the first person as "we,"
"our" or "us."

EXECUTIVE OVERVIEW

     Consumers, a subsidiary of CMS Energy, a holding company, is a combination
electric and gas utility company serving Michigan's Lower Peninsula. Our
customer base includes a mix of residential, commercial, and diversified
industrial customers, the largest segment of which is the automotive industry.

     We manage our business by the nature of services each provides and operate
principally in two business segments: electric utility and gas utility. Our
electric utility operations include the generation, purchase, distribution, and
sale of electricity. Our gas utility operations include the purchase,
transportation, storage, distribution, and sale of natural gas.

     We earn our revenue and generate cash from operations by providing electric
and natural gas utility services, electric power generation, gas transmission
and storage, and other energy related services. Our businesses are affected
primarily by:

     - weather, especially during the traditional heating and cooling seasons,

     - economic conditions,

     - regulation and regulatory issues,

     - energy commodity prices,

     - interest rates, and

     - our debt credit rating.

     During the past two years, our business strategy has involved improving our
balance sheet and maintaining focus on our core strength: utility operations and
service. In 2005, we continued our focus on utility operations and meeting
customer commitments.

     We are focused on growing the equity base of our company and have been
refinancing our debt to reduce interest rate costs. In 2005, we retired
higher-interest rate debt through the use of proceeds from the issuance of $875
million of FMB. We also received cash contributions from CMS Energy of $700
million in 2005. In January 2006, we received an additional $100 million cash
contribution from CMS Energy and in February 2006, we extinguished, through a
legal defeasance, $129 million of 9 percent notes.

     Despite this progress, working capital and cash flow continue to be a
challenge for us. Natural gas prices continue to increase substantially.
Although our natural gas purchases are recoverable from our utility customers,
as gas prices increase, the amount we pay for natural gas will require
additional liquidity due to the lag in cost recoveries.

     In addition to causing working capital issues for us, rising natural gas
prices caused the MCV Partnership to reevaluate the economics of operating the
MCV Facility and to determine that an impairment charge of $1.159 billion was
required in September 2005. As a result, our 2005 net income was reduced by $369
million, after accounting for minority interest and tax effects. We further
reduced our 2005 net income by $16 million by impairing certain other assets on
our Consolidated Balance Sheets related to the MCV Partnership. For additional
details regarding the impairment, see Note 2, Asset Impairment Charges.

     Projected future gas prices continue to threaten the continuing viability
of the MCV Facility. We are evaluating various alternatives in order to develop
a new long-term strategy with respect to the MCV Facility. The MCV Partnership
is working aggressively to reduce costs, improve operations, and enhance cash
flows. However, continued high gas prices could result in a further impairment
of our ownership interests in the MCV Partnership and the FMLP.
                                       CE-3
<PAGE>

     Going forward, our strategy will continue to focus on:

     - managing cash flow issues caused by rising gas prices,

     - maintaining and growing earnings, and

     - investing in our utility system to enable us to meet our commitments to
       customers and comply with increasing environmental performance standards.

     As we execute our strategy, we will need to overcome a sluggish Michigan
economy that has been further hampered by recent negative developments in
Michigan's automotive industry and limited growth in the non-automotive and
health services sectors of our economy.

     These negative effects will be offset somewhat by the reduction we are
experiencing in ROA load in our service territory. At December 31, 2005,
alternative electric suppliers were providing 552 MW of generation service to
ROA customers. This amount represents a decrease of 40 percent compared to
December 31, 2004, and is 7 percent of our total distribution load. It is,
however, difficult to predict future ROA customer trends.

FORWARD-LOOKING STATEMENTS AND INFORMATION

     This Form 10-K and other written and oral statements that we make contain
forward-looking statements as defined by the Private Securities Litigation
Reform Act of 1995. Our intention with the use of words such as "may," "could,"
"anticipates," "believes," "estimates," "expects," "intends," "plans," and other
similar words is to identify forward-looking statements that involve risk and
uncertainty. We designed this discussion of potential risks and uncertainties to
highlight important factors that may impact our business and financial outlook.
We have no obligation to update or revise forward-looking statements regardless
of whether new information, future events, or any other factors affect the
information contained in the statements. These forward-looking statements are
subject to various factors that could cause our actual results to differ
materially from the results anticipated in these statements. Such factors
include our inability to predict and/or control:

     - capital and financial market conditions, including the price of CMS
       Energy Common Stock, and the effect of such market conditions on the
       Pension Plan, interest rates, and access to the capital markets,
       including availability of financing to Consumers, CMS Energy, or any of
       their affiliates and the energy industry,

     - market perception of the energy industry, Consumers, CMS Energy, or any
       of their affiliates,

     - credit ratings of Consumers, CMS Energy, or any of their affiliates,

     - factors affecting utility and diversified energy operations such as
       unusual weather conditions, catastrophic weather-related damage,
       unscheduled generation outages, maintenance or repairs, environmental
       incidents, or electric transmission or gas pipeline system constraints,

     - international, national, regional, and local economic, competitive, and
       regulatory policies, conditions and developments,

     - adverse regulatory or legal decisions, including those related to
       environmental laws and regulations, and potential environmental
       remediation costs associated with such decisions,

     - potentially adverse regulatory treatment and/or regulatory lag concerning
       a number of significant questions presently before the MPSC including:

       - recovery of Clean Air Act costs and other environmental and
         safety-related expenditures,

       - power supply and natural gas supply costs when oil prices and other
         fuel prices are rapidly increasing,

       - timely recognition in rates of additional equity investments in
         Consumers,

       - adequate and timely recovery of additional electric and gas rate-based
         investments,

       - adequate and timely recovery of higher MISO energy costs, and

       - recovery of future Stranded Costs incurred due to customers choosing
         alternative energy suppliers,

                                       CE-4
<PAGE>

     - the impact of adverse natural gas prices on the MCV Partnership and FMLP
       investments, regulatory decisions that limit recovery of capacity and
       fixed energy payments, and our ability to develop a new long-term
       strategy with respect to the MCV Facility,

     - federal regulation of electric sales and transmission of electricity,
       including periodic re-examination by federal regulators of our
       market-based sales authorizations in wholesale power markets without
       price restrictions,

     - energy markets, including availability of capacity and the timing and
       extent of changes in commodity prices for oil, coal, natural gas, natural
       gas liquids, electricity and certain related products due to lower or
       higher demand, shortages, transportation problems, or other developments,

     - our ability to collect accounts receivable from our gas customers due to
       high natural gas prices,

     - the GAAP requirement that we utilize mark-to-market accounting on certain
       energy commodity contracts and interest rate swaps, which may have, in
       any given period, a significant positive or negative effect on earnings,
       which could change dramatically or be eliminated in subsequent periods
       and could add to earnings volatility,

     - the effect on our electric utility of the direct and indirect impacts of
       the continued economic downturn experienced by our automotive and
       automotive parts manufacturing customers,

     - potential disruption or interruption of facilities or operations due to
       accidents or terrorism, and the ability to obtain or maintain insurance
       coverage for such events,

     - nuclear power plant performance, decommissioning, policies, procedures,
       incidents, and regulation, including the availability of spent nuclear
       fuel storage,

     - technological developments in energy production, delivery, and usage,

     - achievement of capital expenditure and operating expense goals,

     - changes in financial or regulatory accounting principles or policies,

     - changes in tax laws or new IRS interpretations of existing tax laws,

     - outcome, cost, and other effects of legal and administrative proceedings,
       settlements, investigations and claims,

     - limitations on our ability to control the development or operation of
       projects in which our subsidiaries have a minority interest,

     - disruptions in the normal commercial insurance and surety bond markets
       that may increase costs or reduce traditional insurance coverage,
       particularly terrorism and sabotage insurance and performance bonds,

     - other business or investment considerations that may be disclosed from
       time to time in Consumers' or CMS Energy's SEC filings, or in other
       publicly issued written documents, and

     - other uncertainties that are difficult to predict, and many of which are
       beyond our control.

     For additional information regarding these and other uncertainties, see
Item 1A. Risk Factors, and Note 3, Contingencies.

                                       CE-5
<PAGE>

RESULTS OF OPERATIONS

NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDER

<Table>
<Caption>
                                                                   YEARS ENDED DECEMBER 31
                                                      -------------------------------------------------
                                                      2005     2004    CHANGE    2004    2003    CHANGE
                                                      ----     ----    ------    ----    ----    ------
                                                                        (IN MILLIONS)
<S>                                                   <C>      <C>     <C>       <C>     <C>     <C>
  Electric........................................    $ 153    $222    $ (69)    $222    $167     $55
  Gas.............................................       48      71      (23)      71      38      33
  Other (Includes MCV Partnership interest).......     (299)    (16)    (283)     (16)    (11)     (5)
                                                      -----    ----    -----     ----    ----     ---
Net Income (Loss) Available to Common
  Stockholder.....................................    $ (98)   $277    $(375)    $277    $194     $83
                                                      =====    ====    =====     ====    ====     ===
</Table>

     For 2005, our net loss available to our common stockholder was $98 million,
compared to net income available to our common stockholder of $277 million for
2004. The decrease is primarily due to an impairment charge to property, plant,
and equipment at the MCV Partnership to reflect the excess of the carrying value
of these assets over their estimated fair value. For additional details on the
impairment of the MCV Facility, see Note 2, Asset Impairment Charges. The
decrease also reflects a reduction in net income from our electric utility, as
higher operating and maintenance costs exceeded higher, weather-driven sales to
our residential customers. Additionally, the decrease reflects a reduction in
net income from our gas utility, as higher operating and maintenance costs
exceeded the benefits derived from the increase in revenue resulting from the
gas rates surcharge authorized by the MPSC in October of 2004. Partially
offsetting these decreases is an increase in the fair value of certain long-term
gas contracts and financial hedges at the MCV Partnership.

     Specific changes to net income (loss) available to our common stockholder
for 2005 versus 2004 are:

<Table>
<Caption>
                                                              IN MILLIONS
                                                              -----------
<S>                                                           <C>
     - decrease in earnings related to our ownership
       interest in the MCV Partnership due to an impairment
       charge to property, plant, and equipment to reflect
       excess of the carrying value over the estimated fair
       value of the assets, offset partially by an increase
       of $100 million from operations, primarily due to an
       increase in fair value of certain long-term gas
       contracts and financial hedges,......................     $(285)

     - increase in operating expenses primarily due to
       higher depreciation and amortization expense, higher
       pension and benefit expense, higher underrecovery
       expense related to the MCV PPA, offset partially by
       our direct savings from the RCP,.....................      (136)

     - increase in underrecoveries of electric power supply
       costs due primarily to higher coal costs, as these
       costs could not be recovered from certain customers
       due to rate caps that expired at the end of 2005,....       (30)

     - decrease in return on electric utility capital
       expenditures in excess of depreciation base as
       allowed by the Customer Choice Act, net of related
       capitalized interest,................................       (20)

     - increase in electric delivery revenue due to warmer
       weather and increased surcharge revenue,.............        59

     - decrease in interest charges,........................        12

     - increase in gas delivery revenue due to the MPSC's
       October 2004 final gas rate order and higher
       miscellaneous income, offset partially by lower
       deliveries, and......................................        20

     - decrease in general tax expense. ....................         5
                                                                 -----
      Total Change..........................................     $(375)
                                                                 =====
</Table>

     For 2004, our net income available to our common stockholder was $277
million, compared to $194 million of net income available to our common
stockholder for 2003. The increase is primarily due to lower operating expenses,
reflecting the MPSC's approval for recovery of stranded costs for 2002 and 2003,
and the deferral of electric depreciation expense on our excess capital
expenditures as permitted by the Customer Choice Act. Also

                                       CE-6
<PAGE>

contributing to the increase was $73 million of additional return on capital
expenditures in excess of our depreciation base as permitted by the Customer
Choice Act. Partially offsetting these increases are higher interest charges
primarily due to a reduction in capitalized interest on the Clean Air Act costs
incurred during the period June 2000 through December 2003, and a $22 million
decrease in electric delivery revenue primarily due to tariff revenue
reductions, customers choosing alternative electric suppliers, and milder summer
temperatures.

     Specific changes to net income available to our common stockholder for 2004
versus 2003 are:

<Table>
<Caption>
                                                              IN MILLIONS
                                                              -----------
<S>                                                           <C>
     - reduction in operating expenses, reflecting the
       MPSC's approval for recovery of stranded costs for
       2002 and 2003, the deferral of electric depreciation
       expense on our excess capital expenditures as
       permitted by the Customer Choice Act, reduced gas
       depreciation rates as authorized by the MPSC,
       decreased pension costs, and the 2004 reduction to
       benefit expense due to the subsidy provided under
       Part D of the Medicare Prescription Drug, Improvement
       and Modernization Act,...............................     $  85

     - increase in return on electric utility capital
       expenditures in excess of the depreciation base as
       allowed by the Customer Choice Act, net of related
       capitalized interest,................................        50

     - increase in gas delivery revenue due to the MPSC's
       December 2003 interim and October 2004 final gas rate
       orders,..............................................        18

     - increase in earnings due to the absence of a charge
       taken in 2003 to reflect a decline in the market
       value of CMS Energy common stock held by us,.........        12

     - increase in gas wholesale and retail services and
       other gas revenues, primarily due to the absence of a
       2003 revenue reduction due to the 2002-2003 GCR
       disallowance,........................................         5

     - decrease in electric delivery revenue primarily due
       to tariff revenue reductions, customers choosing
       alternative electric suppliers, and milder summer
       temperatures' negative impact on air conditioning
       usage,...............................................       (22)

     - increase in underrecoveries of electric power supply
       costs due primarily to higher coal costs, as these
       costs could not be recovered from certain customers
       due to rate caps that expired at the end of 2005,....       (20)

     - decrease in earnings related to our ownership
       interest in the MCV Partnership due to increases in
       non-recoverable fuel costs incurred by the MCV
       Facility,............................................       (19)

     - decrease in earnings due to higher interest
       charges,.............................................       (13)

     - increase in general tax expense, primarily due to the
       absence of a 2003 reduction in MSBT expense related
       to a tax credit received for construction of our
       corporate headquarters on a Brownfield site, and.....        (8)

     - decrease in gas delivery revenue due to milder
       weather. ............................................        (5)
                                                                 -----
Total Change................................................     $  83
                                                                 =====
</Table>

                                       CE-7
<PAGE>

ELECTRIC UTILITY RESULTS OF OPERATIONS

<Table>
<Caption>
                                                                   YEARS ENDED DECEMBER 31,
                                                       ------------------------------------------------
                                                       2005    2004    CHANGE    2004    2003    CHANGE
                                                       ----    ----    ------    ----    ----    ------
                                                                        (IN MILLIONS)
<S>                                                    <C>     <C>     <C>       <C>     <C>     <C>
Net income.........................................    $153    $222    $ (69)    $222    $167     $ 55
                                                       ====    ====    =====     ====    ====     ====
Reasons for the change:
Electric deliveries................................                    $  91                      $(34)
Power supply costs and related revenue.............                      (46)                      (31)
Other operating expenses, other income and
  non-commodity revenue............................                     (131)                       91
Regulatory return on capital expenditures and
  related capitalized interest.....................                      (30)                       77
General taxes......................................                        6                        (8)
Interest charges...................................                        5                        (9)
Income taxes.......................................                       35                       (30)
Cumulative effect of change in accounting, net of
  tax expense......................................                        1                        (1)
                                                                       -----                      ----
Total change.......................................                    $ (69)                     $ 55
                                                                       =====                      ====
</Table>

     ELECTRIC DELIVERIES: For 2005, electric deliveries to end-use customers
increased 1.3 billion kWh or 3.4 percent versus 2004. The corresponding increase
in electric delivery revenue was due to increased sales to residential
customers, reflecting warmer summer weather and increased surcharge revenue from
all customers.

     On July 1, 2004, Consumers started collecting a surcharge to recover costs
incurred in the transition to customer choice. This surcharge increased electric
delivery revenue by $13 million in 2005 versus 2004. Surcharge revenue related
to the recovery of security costs and stranded costs increased electric delivery
revenue by an additional $10 million in 2005 versus 2004.

     For 2004, electric deliveries to end-use customers increased 0.1 billion
kWh or 0.4 percent versus 2003. Despite the increase in electric deliveries,
electric delivery revenue decreased due to the milder summer temperatures'
negative impact on residential customer air conditioning usage, customers
choosing alternative electric suppliers, and tariff revenue reductions. The
tariff revenue reductions began on January 1, 2004, and were equivalent to the
Big Rock nuclear decommissioning surcharge in effect when our electric retail
rates were frozen from June 2000 through December 31, 2003. The tariff revenue
reductions decreased electric delivery revenue by $35 million.

     Surcharges related to the recovery of costs incurred in the transition to
customer choice offset partially the reductions to electric delivery revenue.
Recovery of these costs began on July 1, 2004 and increased electric delivery
revenue by $10 million in 2004 versus 2003.

     POWER SUPPLY COSTS AND RELATED REVENUE: Our recovery of power supply costs
was capped for our residential customers until January 1, 2006. For 2005, our
underrecovery of power costs allocated to these capped customers increased by
$76 million versus 2004. Power supply-related costs increased in 2005 primarily
due to higher coal costs and higher purchased power costs due to higher
weather-driven sales.

     Partially offsetting these underrecoveries were benefits from the deferral
of transmission and nitrogen oxide allowance expenditures related to our capped
customers. To the extent these costs were not fully recoverable due to the
application of rate caps, we deferred these costs for recovery under Public Act
141. In December 2005, the MPSC approved the recovery of these costs. For
additional details, see "Electric Business Uncertainties -- Competition and
Regulatory Restructuring" within this MD&A. For 2005, deferrals of these costs
increased by $30 million versus 2004.

     For 2004, our recovery of power supply costs was capped for the residential
and small commercial customer classes. Operating income decreased $31 million in
2004 versus 2003 primarily due to power supply-related costs exceeding power
supply-related revenue charged to capped customers. Power supply-related costs
increased in

                                       CE-8
<PAGE>

2004 primarily due to higher-priced purchased power necessary to replace the
generation loss from an extended refueling outage at our Palisades nuclear
generating plant and higher coal prices.

     OTHER OPERATING EXPENSES, OTHER INCOME AND NON-COMMODITY REVENUE: For 2005,
other operating expenses increased $139 million, other income increased $4
million, and non-commodity revenue increased $4 million versus 2004.

     The increase in other operating expenses reflects higher depreciation and
amortization expense, higher pension and benefit expense, and higher
underrecovery expense related to the MCV PPA, offset partially by our direct
savings from the RCP. Depreciation and amortization expense increased primarily
due to a reduction in 2004 expense to reflect an MPSC order allowing recovery of
$57 million of Stranded Costs. Pension and benefit expense increased primarily
due to changes in actuarial assumptions and the remeasurement of our pension and
OPEB plans to reflect the new collective bargaining agreement between the
Utility Workers Union of America and Consumers. Benefit expense also reflects
the reinstatement of the employer matching contribution to our 401(k) plan in
January 2005.

     In 1992, a liability was established for estimated future underrecoveries
of power supply costs under the MCV PPA. In 2004, a portion of the cash
underrecoveries continued to reduce this liability until its depletion in
December. In 2005, all cash underrecoveries were expensed directly to income.
Consequently, the cost associated with the MCV PPA cash underrecoveries
increased operating expense $30 million for 2005 versus 2004. Offsetting this
increased operating expense were the savings from the RCP approved by the MPSC
in January 2005.

     The RCP allows us to dispatch the MCV Facility on the basis of natural gas
prices, which will reduce the MCV Facility's annual production of electricity
and, as a result, reduce the MCV Facility's consumption of natural gas. The MCV
Facility's fuel cost savings are first used to offset the cost of replacement
power and fund a renewable energy program. Remaining savings are split between
us and the MCV Partnership. Our direct savings were shared 50 percent with
customers in 2005 and will be shared 70 percent thereafter. Our direct savings,
after allocating an equal portion to customers, was $32 million for 2005.

     For 2005, the increase in other income was primarily due to higher interest
income on short-term cash investments versus 2004, offset partially by expenses
associated with the early retirement of debt. The increase in non-commodity
revenue was primarily due to higher transmission services revenue versus 2004.

     For 2004, other operating expenses decreased $82 million, other income
increased $12 million, and non-commodity revenue decreased $3 million versus
2003. Other operating expenses decreased due to reduced depreciation, pension,
and benefit expenses. The decrease in depreciation expense reflects an MPSC
order allowing recovery of $57 million of Stranded Costs incurred from 2002 to
2003. The decrease in pension expense reflects fewer current-year retirees
choosing to receive a single lump sum distribution, and increased plan earnings
from higher average plan assets. The reduction in benefit expense is due to the
subsidy provided under Part D of the Medicare Prescription Drug, Improvement and
Modernization Act. Other income increased primarily due to $7 million of
interest income related to our 2002 and 2003 Stranded Cost recovery as
authorized by the MPSC.

     REGULATORY RETURN ON CAPITAL EXPENDITURES AND RELATED CAPITALIZED
INTEREST: For 2005, the return on capital expenditures in excess of our
depreciation base, net of related capitalized interest, decreased income by $30
million versus 2004. The decrease reflects the impact of the MPSC's December
2005 order authorizing recovery of and a return on our capital expenditures in
excess of our depreciation base.

     For 2004, the return on capital expenditures in excess of our depreciation
base, net of related capitalized interest, increased income by $77 million
versus 2003. The increase reflects a $72 million return on Clean Air Act costs
incurred during the period June 2000 through December 2003 to reflect an
interpretation of the Customer Choice Act by the MPSC in a rate order involving
Detroit Edison.

     GENERAL TAXES: For 2005, general taxes decreased primarily due to lower
property tax expense. Lower property tax expense in 2005 reflects the use of
revised tax tables by several of Consumers' taxing authorities and, separately,
other property tax refunds.

                                       CE-9
<PAGE>

     For 2004, general taxes increased primarily due to increases in property
tax expense and the absence of a MSBT credit received in 2003. The 2003 MSBT
credit was associated with the construction of our corporate headquarters on a
qualifying Brownfield site.

     INTEREST CHARGES: For 2005, interest charges reflect a 31 basis point
reduction in the average rate of interest on our debt. This benefit was offset
partially by higher average debt levels versus 2004.

     For 2004, interest charges reflect higher average debt levels, offset
partially by a 46 basis point reduction in the average rate of interest on our
debt versus 2003.

     INCOME TAXES: For 2005, income taxes decreased primarily due to lower
earnings versus 2004, offset partially by a $2 million increase to reflect the
tax treatment of items related to property, plant, and equipment as required by
past MPSC orders.

     For 2004, income taxes increased primarily due to increased earnings from
the electric utility versus 2003. The increase also reflects $2 million related
to the tax treatment of items related to property, plant, and equipment as
required by past MPSC orders. This increase was offset partially by the benefits
received from Part D of the Medicare Prescription Drug, Improvement and
Modernization Act, which was signed into law in December 2003.

     CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING, NET OF TAX EXPENSE: The
measurement date for all of Consumers' plans is November 30 for 2005 and 2004,
and December 31 for 2003. As a result of the measurement date change, in 2004 we
recorded a $1 million, net of tax, cumulative effect adjustment as a decrease to
earnings.

GAS UTILITY RESULTS OF OPERATIONS

<Table>
<Caption>
YEARS ENDED DECEMBER 31                              2005   2004   CHANGE   2004   2003   CHANGE
-----------------------                              ----   ----   ------   ----   ----   ------
                                                                    (IN MILLIONS)
<S>                                                  <C>    <C>    <C>      <C>    <C>    <C>
Net income.........................................  $48    $71     $(23)   $71    $38     $ 33
                                                     ===    ===     ====    ===    ===     ====
Reasons for the change:
Gas deliveries.....................................                 $ (6)                  $ (7)
Gas rate increase..................................                   28                     28
Gas wholesale and retail services, other gas
  revenue and other income.........................                    9                      8
Operation and maintenance..........................                  (49)                    11
General taxes......................................                    1                     (4)
Depreciation.......................................                   (5)                    16
Interest charges...................................                   (2)                   (14)
Income taxes.......................................                    1                     (5)
                                                                    ----                   ----
Total change.......................................                 $(23)                  $ 33
                                                                    ====                   ====
</Table>

     GAS DELIVERIES: For 2005, gas delivery revenues reflect lower deliveries to
our customers versus 2004. Gas deliveries, including miscellaneous
transportation to end-use customers, decreased 2.4 bcf or 0.7 percent.

     For 2004, gas deliveries, including transportation to end-use customers,
decreased 15.5 bcf or 4.6 percent due to milder weather versus 2003. Most
significantly, temperatures in the first quarter of the year were 12.1 percent
warmer than in the same period in 2003. The decrease in gas delivery revenues
was offset partially by a $12 million increase in gas revenues associated with
our annual analysis of gas losses related to the gas transmission and
distribution system.

     GAS RATE INCREASE: In December 2003, the MPSC issued an interim gas rate
order authorizing a $19 million annual increase to gas tariff rates. In October
2004, the MPSC issued a final order authorizing an annual increase of $58
million through a two-year surcharge. As a result of these orders, gas revenues
increased $28 million for 2005 versus 2004 and $28 million for 2004 versus 2003.

     GAS WHOLESALE AND RETAIL SERVICES, OTHER GAS REVENUE AND OTHER INCOME: For
2005, income from gas wholesale and retail services and other gas revenue
increased versus 2004. Other income increased primarily due

                                      CE-10
<PAGE>

to higher interest income on short-term cash investments, offset partially by
expenses associated with the early retirement of debt, versus 2004.

     For 2004, gas wholesale and retail services and other gas revenue increased
primarily due to the absence of certain 2003 reductions to revenue. In 2003, gas
revenue was reduced primarily due to an $11 million 2002-2003 GCR disallowance.
Other income remained consistent with 2003.

     OPERATION AND MAINTENANCE: For 2005, operation and maintenance expenses
increased primarily due to increases in benefit costs and additional safety,
reliability, and customer service expenses versus 2004. Pension and benefit
expense increased primarily due to changes in actuarial assumptions and the
remeasurement of our pension and OPEB plans to reflect the new collective
bargaining agreement between the Utility Workers Union of America and Consumers.
Benefit expense also reflects the reinstatement of the employer matching
contribution to our 401(k) plan in January 2005.

     For 2004, operation and maintenance expenses decreased primarily due to
reduced pension and benefit expense of $23 million versus 2003. The decrease in
pension expense reflects fewer current year retirees choosing to receive a
single lump sum distribution, and increased plan earnings from higher average
plan assets. The reduction in benefit expense is due to the subsidy provided
under Part D of the Medicare Prescription Drug, Improvement and Modernization
Act. These reductions were offset partially by increased expenditures on safety,
reliability, and customer service.

     GENERAL TAXES: For 2005, general taxes decreased primarily due to lower
property tax expense versus 2004. Lower property tax expense in 2005 reflects an
increased use of revised tax tables by several of Consumers' taxing authorities,
and separately, other property tax refunds. For 2004, general taxes increased
due to the absence of an MSBT credit received in 2003. The 2003 MSBT credit
received from the state of Michigan was associated with the construction of our
corporate headquarters on a qualifying Brownfield site.

     DEPRECIATION: For 2005, depreciation expense increased primarily due to
higher plant in service versus 2004. For 2004 versus 2003, depreciation expense
decreased primarily due to reduced rates authorized by the MPSC's December 2003
interim rate order and the MPSC's October 2004 order, as modified by its
December 2004 order granting rehearing.

     INTEREST CHARGES: For 2005, interest charges reflect a 31 basis point
reduction in the average rate of interest on our debt and higher average debt
levels versus 2004.

     For 2004, interest charges reflect higher average debt levels, offset
partially by a 46 basis point reduction in the average rate of interest on our
debt versus 2003.

     INCOME TAXES: For 2005, income taxes decreased due to lower earnings versus
2004. This decrease was offset by $5 million to reflect the tax treatment of
items related to property, plant, and equipment as required by past MPSC orders,
and the write-off of general business credits expected to expire in 2005.

     For 2004, income taxes increased due to increased earnings versus 2003.
This increase was offset by $7 million to reflect the tax treatment of items
related to property, plant, and equipment as required by past MPSC orders, and
by Part D of the Medicare Prescription Drug, Improvement and Modernization Act,
which was signed into law in December 2003.

OTHER RESULTS OF OPERATIONS

<Table>
<Caption>
YEARS ENDED DECEMBER 31                            2005    2004   CHANGE   2004   2003   CHANGE
-----------------------                            ----    ----   ------   ----   ----   ------
                                                                  (IN MILLIONS)
<S>                                                <C>     <C>    <C>      <C>    <C>    <C>
Net loss.........................................  $(299)  $(16)  $(283)   $(16)  $(11)   $(5)
</Table>

     For 2005, other operations decreased net income by $299 million, a decrease
of $283 million versus 2004. The change is primarily due to a $285 million
decrease in earnings related to our ownership interest in the MCV Partnership.
In September 2005, the MCV Partnership recorded an impairment charge to
property, plant, and equipment to reflect the excess of the carrying value of
these assets over their estimated fair value. Partially

                                      CE-11
<PAGE>

offsetting the impairment charge is an increase in the fair value of certain
long term gas contracts and related financial hedges at the MCV Partnership.

     For 2004, other operations decreased net income by $16 million, a decrease
of $5 million in income versus 2003. The change is primarily due to a decrease
in earnings related to our ownership interest in the MCV Partnership due to
non-recoverable fuel costs incurred at the MCV Facility.

CRITICAL ACCOUNTING POLICIES

     The following accounting policies are important to an understanding of our
results of operations and financial condition and should be considered an
integral part of our MD&A:

     - use of estimates and assumptions in accounting for contingencies and
       long-lived assets and equity method investments,

     - accounting for the effects of industry regulation,

     - accounting for financial and derivative instruments and market risk
       information,

     - accounting for pension and OPEB,

     - accounting for asset retirement obligations,

     - accounting for nuclear decommissioning costs, and

     - accounting for related party transactions.

For additional accounting policies, see Note 1, Corporate Structure and
Accounting Policies.

USE OF ESTIMATES AND ASSUMPTIONS

     In preparing our financial statements, we use estimates and assumptions
that may affect reported amounts and disclosures. We use accounting estimates
for asset valuations, depreciation, amortization, financial and derivative
instruments, employee benefits, and contingencies. For example, we estimate the
rate of return on plan assets and the cost of future health-care benefits to
determine our annual pension and other postretirement benefit costs. There are
risks and uncertainties that may cause actual results to differ from estimated
results, such as changes in the regulatory environment, competition, regulatory
decisions, and lawsuits.

     CONTINGENCIES: We are involved in various regulatory and legal proceedings
that arise in the ordinary course of our business. We record a liability for
contingencies based upon our assessment that a loss is probable and the amount
of loss can be reasonably estimated. The recording of estimated liabilities for
contingencies is guided by the principles in SFAS No. 5. We consider many
factors in making these assessments, including the history and specifics of each
matter. Significant contingencies are discussed in the "Outlook" section
included in this MD&A.

     LONG-LIVED ASSETS AND EQUITY METHOD INVESTMENTS: Our assessment of the
recoverability of long-lived assets and equity method investments involves
critical accounting estimates. We periodically perform tests of impairment if
certain conditions that are other than temporary exist that may indicate the
carrying value may not be recoverable. Of our total assets, recorded at $13.157
billion at December 3l, 2005, 56 percent represent long-lived assets and equity
method investments that are subject to this type of analysis. We base our
evaluations of impairment on such indicators as:

     - the nature of the assets,

     - projected future economic benefits,

     - regulatory and political environments,

     - state and federal regulatory and political environments,

                                      CE-12
<PAGE>

     - historical and future cash flow and profitability measurements, and

     - other external market conditions or factors.

     If an event occurs or circumstances change in a manner that indicates the
recoverability of a long-lived asset should be assessed, we evaluate the asset
for impairment. An asset held-in-use is evaluated for impairment by calculating
the undiscounted future cash flows expected to result from the use of the asset
and its eventual disposition. If the undiscounted future cash flows are less
than the carrying amount, we recognize an impairment loss. The impairment loss
recognized is the amount by which the carrying amount exceeds the fair value. We
estimate the fair market value of the asset utilizing the best information
available. This information includes quoted market prices, market prices of
similar assets, and discounted future cash flow analyses. An asset considered
held-for-sale is recorded at the lower of its carrying amount or fair value,
less cost to sell.

     We also assess our ability to recover the carrying amounts of our equity
method investments. This assessment requires us to determine the fair values of
our equity method investments. The determination of fair value is based on
valuation methodologies including discounted cash flows and the ability of the
investee to sustain an earnings capacity that justifies the carrying amount of
the investment. If the fair value is less than the carrying value and the
decline in value is considered to be other than temporary, an appropriate
write-down is recorded.

     Our assessments of fair value using these valuation methodologies represent
our best estimates at the time of the reviews and are consistent with our
internal planning. The estimates we use can change over time, which could have a
material impact on our financial statements.

     For additional details on asset impairments, see Note 2, Asset Impairment
Charges.

ACCOUNTING FOR THE EFFECTS OF INDUSTRY REGULATION

     Because we are involved in a regulated industry, regulatory decisions
affect the timing and recognition of revenues and expenses. We use SFAS No. 71
to account for the effects of these regulatory decisions. As a result, we may
defer or recognize revenues and expenses differently than a non-regulated
entity.

     For example, we may record as regulatory assets items that a non-regulated
entity normally would expense if the actions of the regulator indicate such
expenses will be recovered in future rates. Conversely, we may record as
regulatory liabilities items that non-regulated entities may normally recognize
as revenues if the actions of the regulator indicate they will require that such
revenues be refunded to customers. Judgment is required to determine the
recoverability of items recorded as regulatory assets and liabilities. At
December 31, 2005, we had $1.800 billion recorded as regulatory assets and
$1.753 billion recorded as regulatory liabilities.

ACCOUNTING FOR FINANCIAL AND DERIVATIVE INSTRUMENTS AND MARKET RISK INFORMATION

     FINANCIAL INSTRUMENTS: We account for investments in debt and equity
securities using SFAS No. 115. Debt and equity securities classified as
available-for-sale are reported at fair value determined from quoted market
prices. Debt and equity securities classified as held-to-maturity are reported
at cost.

     Unrealized gains or losses resulting from changes in fair value of certain
available-for-sale debt and equity securities are reported, net of tax, in
equity as part of accumulated other comprehensive income. Unrealized gains or
losses are excluded from earnings unless the related changes in fair value are
determined to be other than temporary. Unrealized gains or losses on our nuclear
decommissioning investments are reflected as regulatory liabilities on our
Consolidated Balance Sheets. Realized gains or losses would not affect our
earnings or cash flows.

     DERIVATIVE INSTRUMENTS: We use the criteria in SFAS No. 133 to determine if
certain contracts must be accounted for as derivative instruments. These
criteria are complex and significant judgment is often required in applying the
criteria to specific contracts. If a contract is a derivative, it is recorded on
the balance sheet at its fair value. We then adjust the resulting asset or
liability each quarter to reflect any change in the market value of the
contract, a practice known as marking the contract to market. For additional
details on accounting for derivatives, see Note 5, Financial and Derivative
Instruments.
                                      CE-13
<PAGE>

     To determine the fair value of our derivatives, we use information from
external sources (i.e., quoted market prices and third-party valuations), if
available. For certain contracts, this information is not available and we must
use mathematical valuation models to value our derivatives. These models require
various inputs and assumptions, including commodity market prices and
volatilities, as well as interest rates and contract maturity dates. Changes in
forward prices or volatilities could significantly change the calculated fair
value of our derivative contracts. The cash returns we actually realize on these
contracts may vary, either positively or negatively, from the results that we
estimate using these models. As part of valuing our derivatives at market, we
maintain reserves, if necessary, for credit risks arising from the financial
condition of counterparties.

     The following table summarizes the interest rate and volatility rate
assumptions we used to value these contracts at December 31, 2005:

<Table>
<Caption>
                                                             INTEREST RATES (%)    VOLATILITY RATES (%)
                                                             ------------------    --------------------
<S>                                                          <C>                   <C>
Long-term gas contracts associated with the MCV
  Partnership..............................................    4.39 - 4.92            33 - 73
Gas supply option contracts................................       4.10                70 - 73
</Table>

     The types of contracts we typically classify as derivative instruments are
interest rate swaps, gas supply options, certain long-term gas contracts, and
gas fuel futures, swaps, and options. The majority of our commodity purchase and
sale contracts are not subject to derivative accounting under SFAS No. 133
because:

     - they do not have a notional amount (that is, a number of units specified
       in a derivative instrument, such as MW of electricity or bcf of natural
       gas),

     - they qualify for the normal purchases and sales exception, or

     - there is not an active market for the commodity.

     Our coal purchase contracts are not derivatives because there is not an
active market for the coal we purchase. Similarly, our electric capacity and
energy contracts are not derivatives due to the lack of an active energy market
in Michigan. If active markets for these commodities develop in the future, some
of these contracts may qualify as derivatives. For our coal purchase contracts,
the resulting mark-to-market impact on earnings could be material. For our
electric capacity and energy contracts, we believe that we would be able to
apply the normal purchases and sales exception, and, therefore, would not be
required to mark these contracts to market.

     Establishment of the Midwest Energy Market: The MISO began operating the
Midwest Energy Market on April 1, 2005. By operating the Midwest Energy Market,
the MISO centrally dispatches electricity and transmission service throughout
much of the Midwest and provides day-ahead and real-time energy market
information. At this time, we believe that the establishment of this market does
not represent the development of an active energy market in Michigan, as defined
by SFAS No. 133. However, as the Midwest Energy Market matures, we will continue
to monitor its activity level and evaluate if an active energy market may exist
in Michigan.

     Implementation of the RCP: As a result of implementing the RCP in January
2005, a significant portion of the MCV Partnership's long-term gas contracts no
longer qualify as normal purchases because the gas will not be used to generate
electricity or steam. Accordingly, these contracts are accounted for as
derivatives, with changes in fair value recorded in earnings each quarter.
Additionally, certain of the MCV Partnership's natural gas futures and swap
contracts, which are used to hedge variable-priced long-term gas contracts, no
longer qualify for cash flow hedge accounting and we record any changes in their
fair value in earnings each quarter. As a result of

                                      CE-14
<PAGE>

recording the changes in fair value of these long-term gas contracts and the
related futures and swaps to earnings, the MCV Partnership has recognized the
following gains and losses in 2005:

<Table>
<Caption>
                                                                         2005
                                                     ---------------------------------------------
                                                      FIRST    SECOND     THIRD    FOURTH
                                                     QUARTER   QUARTER   QUARTER   QUARTER   TOTAL
                                                     -------   -------   -------   -------   -----
                                                                      (IN MILLIONS)
<S>                                                  <C>       <C>       <C>       <C>       <C>
Long-term gas contracts............................   $146      $(21)     $117      $ (93)   $149
Related futures and swaps..........................     63       (18)       80        (74)     51
                                                      ----      ----      ----      -----    ----
Total..............................................   $209      $(39)     $197      $(167)   $200
                                                      ====      ====      ====      =====    ====
</Table>

     These gains and losses, shown before consideration of tax effects and
minority interest, are included in the total Fuel costs mark-to-market at MCV on
our Consolidated Statements of Income (Loss). Because of the volatility of the
natural gas market, the MCV Partnership expects future earnings volatility on
both the long-term gas contracts and the futures and swap contracts, since gains
and losses will be recorded each quarter. As a result of mark-to-market gains,
we have recorded derivative assets totaling $256 million associated with the
fair value of these contracts on our Consolidated Balance Sheets. We expect
almost all of these assets to reverse through earnings during 2006 and 2007 as
the gas is purchased and the futures and swaps settle, with the remainder
reversing between 2008 and 2011. Due to the impairment of the MCV Facility, the
equity held by the minority interest owners of the MCV Partnership has decreased
significantly. Since we have the controlling financial interest in the MCV
Partnership, we will assume 100 percent of future losses recognized from the
reversal of these assets, not just our proportionate share.

     MARKET RISK INFORMATION: We are exposed to market risks including, but not
limited to, changes in commodity prices, interest rates, and equity security
prices. We may use various contracts to manage these risks, including options,
futures, swaps, and forward contracts. We enter into these risk management
contracts using established policies and procedures, under the direction of
both:

     - an executive oversight committee consisting of senior management
       representatives, and

     - a risk committee consisting of business unit managers.

     Our intention is that any increases or decreases in the value of these
contracts will be offset by an opposite change in the value of the item at risk.

     These contracts contain credit risk, which is the risk that counterparties,
primarily financial institutions and energy marketers, will fail to perform
their contractual obligations. We reduce this risk through established credit
policies, which include performing financial credit reviews of our
counterparties. We determine our counterparties' credit quality using a number
of factors, including credit ratings, disclosed financial condition, and
collateral requirements. If terms permit, we use standard agreements that allow
us to net positive and negative exposures associated with the same counterparty.
Based on these policies and our current exposures, we do not expect a material
adverse effect on our financial position or earnings as a result of counterparty
nonperformance.

     The following risk sensitivities indicate the potential loss in fair value,
cash flows, or future earnings from our financial instruments, including our
derivative contracts, assuming a hypothetical unfavorable change in market rates
or prices of 10 percent. Changes in excess of the amounts shown in the
sensitivity analyses could occur if changes in market rates or prices exceed the
10 percent shift used for the analyses.

     Interest Rate Risk: We are exposed to interest rate risk resulting from
issuing fixed-rate and variable-rate financing instruments, and from interest
rate swap agreements. We use a combination of these instruments to manage this
risk as deemed appropriate, based upon market conditions. These strategies are
designed to provide and maintain a balance between risk and the lowest cost of
capital.

                                      CE-15
<PAGE>

     Interest Rate Risk Sensitivity Analysis (assuming an unfavorable change in
market interest rates of 10 percent):

<Table>
<Caption>
DECEMBER 31                                                   2005    2004
-----------                                                   ----    ----
                                                              (IN MILLIONS)
<S>                                                           <C>     <C>
Variable-rate financing -- before tax annual earnings
  exposure..................................................  $  3    $  2
Fixed-rate financing -- potential REDUCTION in fair value
  (a).......................................................   149     138
</Table>

---------------

(a) Fair value exposure could only be realized if we repurchased all of our
    fixed-rate financing.

     Commodity Price Risk: Operating in the energy industry, we are exposed to
commodity price risk, which arises from fluctuations in the price of
electricity, natural gas, coal, and other commodities. Commodity prices are
influenced by a number of factors, including weather, changes in supply and
demand, and liquidity of commodity markets. In order to manage commodity price
risk, we enter into various non-trading derivative contracts, such as gas supply
call and put options, long-term gas contracts, gas futures, and gas swaps. For
additional details on these contracts, see Note 5, Financial and Derivative
Instruments.

     Commodity Price Risk Sensitivity Analysis (assuming an unfavorable change
in market prices of 10 percent):

<Table>
<Caption>
DECEMBER 31                                                   2005    2004
-----------                                                   ----    ----
                                                              (IN MILLIONS)
<S>                                                           <C>     <C>
Potential REDUCTION in fair value:
  Gas supply option contracts...............................   $ 1     $ 1
  FTRs......................................................    --      --
  Derivative contracts associated with the MCV Partnership:
     Long-term gas contracts (a)............................    39      17
     Gas futures and swaps..................................    48      41
</Table>

---------------

(a) The increased potential reduction in fair value for the MCV Partnership's
    long-term gas contracts is due to the increased number of contracts
    accounted for as derivatives as a result of the RCP.

     Investment Securities Price Risk: Our investments in debt and equity
securities are exposed to changes in interest rates and price fluctuations in
equity markets. The following table shows the potential effect of adverse
changes in interest rates and fluctuations in equity prices on our
available-for-sale investments.

     Investment Securities Price Risk Sensitivity Analysis (assuming an
unfavorable change in market prices of 10 percent):

<Table>
<Caption>
DECEMBER 31                                                   2005    2004
-----------                                                   ----    ----
                                                              (IN MILLIONS)
<S>                                                           <C>     <C>
Potential REDUCTION in fair value of available-for-sale
  equity securities (SERP investments and investments in CMS
  Energy common stock)......................................   $6      $5
</Table>

     We maintain trust funds, as required by the NRC, for the purpose of funding
certain costs of nuclear plant decommissioning. At December 31, 2005 and 2004,
these funds were invested primarily in equity securities, fixed-rate,
fixed-income debt securities, and cash and cash equivalents, and are recorded at
fair value on our Consolidated Balance Sheets. Those investments are exposed to
price fluctuations in equity markets and changes in interest rates. Because the
accounting for nuclear plant decommissioning recognizes that costs are recovered
through our electric rates, fluctuations in equity prices or interest rates do
not affect our consolidated earnings or cash flows.

     For additional details on market risk and derivative activities, see Note
5, Financial and Derivative Instruments.

                                      CE-16
<PAGE>

ACCOUNTING FOR PENSION AND OPEB

     Pension: We have established external trust funds to provide retirement
pension benefits to our employees under a non-contributory, defined benefit
Pension Plan. We implemented a cash balance plan for certain employees hired
after June 30, 2003. On September 1, 2005, we implemented the DCCP.

     The DCCP provides an employer contribution of 5 percent of base pay to the
existing Employees' Savings Plan. No employee contribution is required in order
to receive the plan's employer cash contribution. All employees hired on and
after September 1, 2005 participate in this plan as part of their retirement
benefit program. Cash balance pension plan participants also participate in the
DCCP as of September 1, 2005. Additional pay credits under the cash balance
pension plan were discontinued as of that date. We use SFAS No. 87 to account
for pension costs.

     401(k): We resumed the employer's match in CMS Energy Common Stock in our
401(k) Savings Plan on January 1, 2005. On September 1, 2005, employees enrolled
in the company's 401(k) Savings Plan had their employer match increased from 50
percent to 60 percent on eligible contributions up to the first six percent of
an employee's wages.

     OPEB: We provide postretirement health and life benefits under our OPEB
plan to substantially all our retired employees. We use SFAS No. 106 to account
for other postretirement benefit costs.

     Liabilities for both pension and OPEB are recorded on the balance sheet at
the present value of their future obligations, net of any plan assets. The
calculation of the liabilities and associated expenses requires the expertise of
actuaries. Many assumptions are made, including:

     - life expectancies,

     - present-value discount rates,

     - expected long-term rate of return on plan assets,

     - rate of compensation increases, and

     - anticipated health care costs.

     Any change in these assumptions can change significantly the liability and
associated expenses recognized in any given year.

     The following table provides an estimate of our pension cost, OPEB cost,
and cash contributions for the next three years:

<Table>
<Caption>
                                                                        EXPECTED COSTS
                                                           ----------------------------------------
                                                           PENSION COST   OPEB COST   CONTRIBUTIONS
                                                           ------------   ---------   -------------
                                                                        (IN MILLIONS)
<S>                                                        <C>            <C>         <C>
2006.....................................................      $ 91          $39          $ 74
2007.....................................................       100           36           167
2008.....................................................        97           32           115
</Table>

     Actual future pension cost and contributions will depend on future
investment performance, changes in future discount rates and various other
factors related to the populations participating in the Pension Plan.

     Lowering the expected long-term rate of return on the Pension Plan assets
by 0.25 percent (from 8.50 percent to 8.25 percent) would increase estimated
pension cost for 2006 by $3 million. Lowering the discount rate by 0.25 percent
(from 5.75 percent to 5.50 percent) would increase estimated pension cost for
2006 by $1 million.

     For additional details on postretirement benefits, see Note 6, Retirement
Benefits.

                                      CE-17
<PAGE>

ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS

     SFAS No. 143, as clarified by FASB Interpretation No. 47, requires
companies to record the fair value of the cost to remove assets at the end of
their useful lives, if there is a legal obligation to remove them. We have legal
obligations to remove some of our assets, including our nuclear plants, at the
end of their useful lives. As required by SFAS No. 71, we accounted for the
implementation of this standard by recording regulatory assets and liabilities
instead of a cumulative effect of a change in accounting principle.

     The fair value of ARO liabilities has been calculated using an expected
present value technique. This technique reflects assumptions such as costs,
inflation, and profit margin that third parties would consider to assume the
settlement of the obligation. Fair value, to the extent possible, should include
a market risk premium for unforeseeable circumstances. No market risk premium
was included in our ARO fair value estimate since a reasonable estimate could
not be made.

     If a reasonable estimate of fair value cannot be made in the period in
which the ARO is incurred, such as for assets with indeterminate lives, the
liability is recognized when a reasonable estimate of fair value can be made.
Generally, gas transmission and electric and gas distribution assets have
indeterminate lives. Retirement cash flows cannot be determined and there is a
low probability of a retirement date. Therefore, no liability has been recorded
for these assets or associated obligations related to potential future
abandonment. In addition, no liability has been recorded for assets that have
insignificant cumulative disposal costs, such as substation batteries. The
measurement of the ARO liabilities for Palisades and Big Rock include use of
decommissioning studies that largely utilize third-party cost estimates. For
additional details on ARO, see Note 7, Asset Retirement Obligations.

ACCOUNTING FOR NUCLEAR DECOMMISSIONING COSTS

     The MPSC and the FERC regulate the recovery of costs to decommission, or
remove from services, our Big Rock and Palisades nuclear plants. Our
decommissioning cost estimates for the Big Rock and Palisades plants assume:

     - each plant site will be restored to conform to the adjacent landscape,

     - all contaminated equipment and material will be removed and disposed of
       in a licensed burial facility, and

     - the site will be released for unrestricted use.

     Independent contractors with expertise in decommissioning have helped us
develop decommissioning cost estimates. Various inflation rates for labor,
non-labor, and contaminated equipment disposal costs are used to escalate these
cost estimates to the future decommissioning cost. A portion of future
decommissioning cost will result from the failure of the DOE to remove fuel from
the sites, as required by the Nuclear Waste Policy Act of 1982.

     We have established external trust funds to finance the decommissioning of
both plants. We record the trust fund balances as a non-current asset on our
Consolidated Balance Sheets. The decommissioning trust funds include equities
and fixed-income investments. Equities will be converted to fixed-income
investments during decommissioning, and fixed-income investments are converted
to cash as needed. The costs of decommissioning these sites and the adequacy of
the trust funds could be affected by:

     - variances from expected trust earnings,

     - a lower recovery of costs from the DOE and lower rate recovery from
       customers, and

     - changes in decommissioning technology, regulations, estimates, or
       assumptions.

     Based on current projections, the current level of funds provided by the
trusts is not adequate to fund fully the decommissioning of Big Rock or
Palisades. This is due in part to the DOE's failure to accept the spent nuclear
fuel on schedule and lower returns on the trust funds. We are attempting to
recover our additional costs for storing spent nuclear fuel through litigation.
At this time, we cannot determine what impact a license renewal for the
Palisades plant will have on decommissioning costs or the adequacy of funding.
For additional details, see

                                      CE-18
<PAGE>

Note 3, Contingencies, "Other Electric Contingencies -- Nuclear Plant
Decommissioning" and "Nuclear Matters," and Note 7, Asset Retirement
Obligations.

RELATED PARTY TRANSACTIONS

     We enter into a number of significant transactions with related parties.
These transactions include:

     - issuance of trust preferred securities with Consumers' affiliated
       companies,

     - purchase and sale of electricity from and to Enterprises,

     - purchase of gas transportation from CMS Bay Area Pipeline, L.L.C.,

     - payment of parent company overhead costs to CMS Energy, and

     - investment in CMS Energy Common Stock.

     Transactions involving CMS Energy and its affiliates generally are based on
regulated prices, market prices, or competitive bidding. Transactions involving
the power supply purchases from certain affiliates of Enterprises are based upon
avoided costs under PURPA and competitive bidding. The payment of parent company
overhead costs is based on the use of accepted industry allocation
methodologies.

     For additional details on related party transactions, see Note 1, Corporate
Structure and Accounting Policies, "Related Party Transactions," and Note 3,
Contingencies, "Other Electric Contingencies -- The Midland Cogeneration
Venture."

CAPITAL RESOURCES AND LIQUIDITY

     Our liquidity and capital requirements are a function of our:

     - results of operations,

     - capital expenditures,

     - contractual obligations,

     - debt maturities,

     - working capital needs, and

     - collateral requirements.

     During the summer months, we purchase natural gas and store it for resale
primarily during the winter heating season. In 2005, the market price for
natural gas increased substantially. Although our prudent natural gas purchases
are recoverable from our customers, as gas prices increase, the amount paid for
natural gas stored as inventory requires additional liquidity due to the timing
of the cost recoveries. We have credit agreements with our commodity suppliers
and those agreements contain terms that have resulted in margin calls.
Additional margin calls or other credit support may be required if agency
ratings are lowered or if market conditions remain unfavorable relative to our
obligations to those parties.

     Our current financial plan includes controlling operating expenses and
capital expenditures and evaluating market conditions for financing
opportunities. Due to the adverse impact of the MCV Partnership asset impairment
charge recorded in September 2005, our ability to issue FMB as primary
obligations or as collateral for financing is expected to be limited to $298
million through September 30, 2006. After September 30, 2006, our ability to
issue FMB in excess of $298 million is based on achieving a two-times FMB
interest coverage ratio.

     We believe the following items will be sufficient to meet our liquidity
needs:

     - our current level of cash and revolving credit facilities,

     - our ability to access junior secured and unsecured borrowing capacity in
       the capital markets, and

     - anticipated cash flows from operating and investing activities.

                                      CE-19
<PAGE>

CASH POSITION, INVESTING, AND FINANCING

     Our operating, investing, and financing activities meet consolidated cash
needs. At December 31, 2005, $599 million consolidated cash was on hand, which
includes $183 million of restricted cash and restricted short-term investments
and $361 million from the entities consolidated pursuant to FASB Interpretation
No. 46. For additional details, see Note 14, Consolidation of Variable Interest
Entities.

SUMMARY OF CASH FLOWS:

<Table>
<Caption>
                                                                2005     2004        2003
                                                                ----     ----        ----
                                                                        (IN MILLIONS)
<S>                                                             <C>      <C>      <C>
Net cash provided by (used in):
  Operating activities......................................    $ 687    $ 640       $   5
  Investing activities......................................     (709)    (562)       (528)
                                                                -----    -----       -----
Net cash provided by (used in) operating and investing
activities..................................................      (22)      78        (523)
  Financing activities......................................      267     (127)        325
                                                                -----    -----       -----
Net Increase (Decrease) in Cash and Cash Equivalents........    $ 245    $ (49)      $(198)
                                                                =====    =====       =====
</Table>

OPERATING ACTIVITIES:

     2005: Net cash provided by operating activities increased $47 million in
2005. Cash provided by operations resulted primarily from a decrease in prepaid
gas margin call costs, an increase in tax liabilities related to a recent IRS
ruling regarding the "simplified service cost" method of tax accounting, the
positive effect of rising gas prices on accounts payable and MCV gas supplier
funds on deposit, and other timing differences. These increases were offset
partially by the negative effect of rising gas prices on accounts receivable and
inventories.

     2004: Net cash provided by operating activities increased $635 million in
2004. The absence, in 2004, of $501 million in pension contributions made in
2003, the reduced effect of rising gas prices on inventory, and other timing
differences represent the majority of the increase. These increases more than
offset an increase in accounts receivable and accrued revenue resulting from
higher gas prices.

INVESTING ACTIVITIES:

     2005: Net cash used in investing activities increased $147 million in 2005
primarily due to an increase in restricted cash and restricted short-term
investments of $159 million. The increase in restricted cash and restricted
short-term investments was due to a deposit made with a trustee for
extinguishing the current portion of long-term debt -- related parties.

     2004: Net cash used in investing activities increased $34 million in 2004
primarily due to an increase in capital expenditures of $22 million. The
increase in capital expenditures resulted from the consolidation of the MCV
Partnership and the FMLP.

FINANCING ACTIVITIES:

     2005: Net cash provided by financing activities increased $394 million in
2005 due to an increase of $450 million in stockholder's contributions from the
parent and an increase in cash due to lower payments on borrowings of $16
million, offset by an increase in common stock dividends payments of $87
million.

     2004: Net cash used in financing activities increased $452 million in 2004
primarily due to a decrease in net proceeds from borrowings of $699 million.
This decrease was offset by a $250 million stockholder's contribution from the
parent.

     For additional details on long-term debt activity, see Note 4, Financings
and Capitalization.

                                      CE-20
<PAGE>

OBLIGATIONS AND COMMITMENTS

     CONTRACTUAL OBLIGATIONS: The following table summarizes our contractual
cash obligations for each of the periods presented. The table shows the timing
and effect that such obligations are expected to have on our liquidity and cash
flow in future periods. The table excludes all amounts classified as current
liabilities on our Consolidated Balance Sheets, other than the current portion
of long-term debt and capital and finance leases. The majority of current
liabilities will be paid in cash in 2006.

CONTRACTUAL OBLIGATIONS AT DECEMBER 31, 2005

<Table>
<Caption>
                                                                              PAYMENTS DUE
                                                          ----------------------------------------------------
                                                          LESS THAN      ONE TO        THREE TO     MORE THAN
                                                TOTAL     ONE YEAR     THREE YEARS    FIVE YEARS    FIVE YEARS
                                                -----     ---------    -----------    ----------    ----------
                                                                        (IN MILLIONS)
<S>                                            <C>        <C>          <C>            <C>           <C>
  Long-term debt...........................    $ 4,388     $   85        $  563         $  786        $2,954
  Long-term debt -- related parties........        129        129            --             --            --
  Interest payments on long-term debt......      2,149        227           421            342         1,159
  Capital and finance leases...............        335         27            55             51           202
  Interest payments on capital and finance
     leases................................        222         30            60             50            82
  Operating leases.........................        128         19            34             26            49
  Purchase obligations.....................      9,036      2,446         2,499          1,398         2,693
  Purchase obligations -- related
     parties...............................      1,506         71           141            141         1,153
  Long-term service agreements.............        194         25            23             30           116
                                               -------     ------        ------         ------        ------
     Total contractual obligations.........    $18,087     $3,059        $3,796         $2,824        $8,408
                                               =======     ======        ======         ======        ======
</Table>

     Long-Term Debt: The amounts in the preceding table represent the principal
amounts due on outstanding debt obligations, current and long-term, at December
31, 2005. For additional details on long-term debt, see Note 4, Financings and
Capitalization.

     Interest payments on long-term debt: The amounts in the preceding table
represent the currently scheduled interest payments on both variable and fixed
rate long-term debt and long-term debt -- related parties, current and
long-term. Variable interest payments are based on contractual rates in effect
at December 31, 2005.

     Capital and finance leases: The amounts in the preceding table represent
the minimum lease payments payable under our capital and finance leases. They
are comprised mainly of the leased portion of the MCV Facility, leased service
vehicles, leased office furniture, and certain power purchase agreements.

     Interest payments on capital and finance leases: The amounts in the
preceding table represent imputed interest in the capital leases and currently
scheduled interest payments on the finance leases.

     Operating Leases: The amounts in the preceding table represent the minimum
noncancelable lease payments under our leases of railroad cars, certain
vehicles, and miscellaneous office buildings and equipment, which are accounted
for as operating leases.

     Purchase Obligations: The amounts in the preceding table represent
long-term contracts for purchase of commodities and services. These obligations
include operating contracts used to assure adequate supply with generating
facilities that meet PURPA requirements. The commodities and services include:

     - natural gas,

     - electricity, and

     - coal and associated transportation.

     Our purchase obligations include long-term power purchase agreements with
various generating plants, which require us to make monthly capacity payments
based on the plants' availability or deliverability. These payments will
approximate $12 million per month during 2006. If a plant is not available to
deliver electricity, we are not obligated to make the capacity payments to the
plant for that period of time. For additional details on

                                      CE-21
<PAGE>

power supply costs, see "Electric Utility Results of Operations" within this
MD&A and Note 3, Contingencies, "Electric Rate Matters -- Power Supply Costs."

     Long-term Service Agreements: The amounts in the preceding table represent
obligations of the MCV Partnership, primarily the cost of the current MCV
Facility maintenance service agreements and cost of spare parts.

     REVOLVING CREDIT FACILITIES: At December 31, 2005, we had $464 million
available and the MCV Partnership had $48 million available in revolving credit
facilities. The facilities are available for general corporate purposes, working
capital, and letters of credit. For additional details on revolving credit
facilities, see Note 4, Financings and Capitalization.

     OFF-BALANCE SHEET ARRANGEMENTS: We enter into various arrangements in the
normal course of business to facilitate commercial transactions with third
parties. These arrangements include indemnifications, letters of credit and
surety bonds.

     We enter into agreements containing indemnifications standard in the
industry and indemnifications specific to a transaction, such as the sale of a
subsidiary. Indemnifications are usually agreements to reimburse other companies
if those companies incur losses due to third-party claims or breach of contract
terms. Banks, on our behalf, issue letters of credit guaranteeing payment to a
third party. Letters of credit substitute the bank's credit for ours and reduce
credit risk for the third-party beneficiary. We monitor these obligations and
believe it is unlikely that we would be required to perform or otherwise incur
any material losses associated with these guarantees. For additional details on
these arrangements, see Note 3, Contingencies, "Other Contingencies -- FASB
Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others."

     SALE OF ACCOUNTS RECEIVABLE: Under a revolving accounts receivable sales
program, we may sell up to $325 million of certain accounts receivable. The
highly liquid and efficient market for securitized financial assets provides a
lower cost source of funding compared to unsecured debt. For additional details,
see Note 4, Financings and Capitalization.

     DIVIDEND RESTRICTIONS: For details on dividend restrictions, see Note 4,
Financings and Capitalization.

     DEBT CREDIT RATING: In November 2005, S&P placed CMS Energy's and
Consumers' debt credit ratings on CreditWatch with negative implications. In
January 2006, S&P removed the ratings from CreditWatch with negative
implications and affirmed CMS Energy's and Consumers' debt credit ratings with a
stable outlook.

                                      CE-22
<PAGE>

     CAPITAL EXPENDITURES: We estimate that we will make the following capital
expenditures, including new lease commitments, by expenditure type and by
business segments during 2006 through 2008. We prepare these estimates for
planning purposes and may revise them.

<Table>
<Caption>
                                                                    YEARS ENDING
                                                                    DECEMBER 31,
                                                                --------------------
                                                                2006    2007    2008
                                                                ----    ----    ----
                                                                   (IN MILLIONS)
<S>                                                             <C>     <C>     <C>
Construction................................................    $406    $482    $493
Clean Air(a)................................................      61      79      17
Cost of Removal.............................................      87      65      53
New Customers...............................................     102     104     106
Other(b)....................................................      67      80      76
                                                                ----    ----    ----
                                                                $723    $810    $745
                                                                ====    ====    ====
Electric utility operations(a)(b)...........................    $536    $615    $505
Gas utility operations(b)...................................     187     195     240
                                                                ----    ----    ----
                                                                $723    $810    $745
                                                                ====    ====    ====
</Table>

-------------------------
(a)  These amounts include estimates for capital expenditures that may be
     required by revisions to the Clean Air Act's national air quality
     standards.

(b)  These amounts include estimates for capital expenditures related to
     information technology projects, facility improvements, and vehicle
     leasing.

OUTLOOK

ELECTRIC BUSINESS OUTLOOK

     GROWTH: Summer 2005 temperatures were higher than historical averages,
leading to increased demand from electric customers. As a result, growth in
electric deliveries in 2005, excluding transactions with other wholesale market
participants and other utilities, was more than three percent. In 2006, we
project electric deliveries to be about flat compared to the levels experienced
in 2005. This short-term outlook for 2006 assumes a recovering economy and
normal weather conditions throughout the year.

     Over the next five years, we expect electric deliveries to grow at an
average rate of approximately two percent per year. However, such growth is
dependent on a modestly growing customer base and recovery of the Michigan
economy. This growth rate includes both full-service sales and delivery service
to customers who choose to buy generation service from an alternative electric
supplier, but excludes transactions with other wholesale market participants and
other electric utilities. This growth rate reflects a long-range expected trend
of growth. Growth from year to year may vary from this trend due to customer
response to fluctuations in weather conditions and changes in economic
conditions, including utilization and expansion or contraction of manufacturing
facilities.

     ELECTRIC RATE CASE: In December 2004, we filed an application with the MPSC
to increase our retail electric base rates. The electric rate case filing
requested an annual increase in revenues of approximately $320 million, which we
revised in August 2005 to approximately $197 million. The primary reasons for
our electric rate case were increased system maintenance and improvement costs,
Clean Air Act-related expenditures, and employee pension costs. In December
2005, the MPSC issued an order that allows a base rate increase in the annual
amount of $86 million, establishes an 11.15 percent authorized return on equity,
and recognizes the impacts on our projected equity investment (infusions and
retained earnings) in 2006. The base rate increase includes a contribution of
$27 million to Michigan's Low Income and Energy Efficiency Fund. Portions of the
base rate increase are subject to refund if expenditures in certain categories
are lower than assumed in establishing rates. New electric base rates became
effective in mid-January 2006.

                                      CE-23
<PAGE>

     In January 2006, an intervenor in the electric rate case filed a petition
with the MPSC to seek rehearing or clarification on certain issues addressed in
the December 2005 order. In January 2006, we also filed a petition to seek
rehearing or clarification on certain issues in the order. We cannot predict the
outcome of these petitions.

     ELECTRIC TRANSMISSION EXPENSES: In December 2005, the FERC issued an order
that conditionally accepts an application from METC, which provides electric
transmission service to us, to increase substantially the transmission rates it
will charge us in 2006. We are attempting to recover these costs through our
2006 PSCR plan case. In December 2005, the MPSC issued an order that temporarily
excludes a portion of the increased costs from our PSCR charge, which began in
January 2006. The PSCR process allows recovery of all reasonable and prudent
power supply costs. However, we cannot predict when full recovery of these
transmission costs will commence. To the extent that we incur and are unable to
collect these increased costs in a timely manner, our cash flows from electric
utility operations will be affected negatively. For additional details, see Note
3, Contingencies, "Electric Rate Matters -- Power Supply Costs."

     ELECTRIC RESERVE MARGIN: To reduce the risk of high electric prices during
peak demand periods and to achieve our reserve margin target, we employ a
strategy of purchasing electric capacity and energy contracts for the physical
delivery of electricity primarily in the summer months and to a lesser degree in
the winter months. We establish a reserve margin target to address various
scenarios and contingencies so that the probability of interrupting service to
retail customers because of a supply shortage is no greater than an
industry-recognized standard. However, even with the reserve margin target,
additional spot purchases may be required during periods when electric prices
are high.

     We are planning currently for a reserve margin of approximately 11 percent
for summer 2006, or supply resources equal to 111 percent of projected firm
summer peak load. Of the 2006 supply resources target of 111 percent, we expect
to meet approximately 96 percent from our electric generating plants and
long-term power purchase contracts, and approximately 15 percent from other
contractual arrangements. We have purchased capacity and energy contracts
covering partially the estimated reserve margin requirements for 2006 through
2010. As a result, we have recognized an asset of $6 million for unexpired
capacity and energy contracts at December 31, 2005.

     ELECTRIC CAPACITY NEEDS FORUM: In January 2006, the MPSC Staff issued a
report on future electric capacity needs in the state of Michigan. The report
indicated that existing generation resources are adequate in the short term, but
could be insufficient to maintain reliability standards by 2009. The report also
indicated that new baseload electric generation may be needed by 2011. The MPSC
Staff recommended an approval and bid process for new power plants. To address
revenue stability risks, the Staff also recommended a special reliability charge
a utility would assess on all electric distribution customers. In January 2006,
the MPSC solicited comments on the capacity needs report and announced a public
hearing for March 2006. We will continue to participate in this forum as the
MPSC develops ratemaking policy to address future electric capacity needs.

     INDUSTRIAL REVENUE OUTLOOK: Our electric utility customer base includes a
mix of residential, commercial, and diversified industrial customers, the
largest segment of which is the automotive industry. In October 2005, Delphi
Corporation (Delphi) filed for Chapter 11 bankruptcy protection. Delphi is the
nation's largest automotive supplier headquartered in Troy, Michigan, and is a
large industrial customer of Consumers. Our electric utility operations are not
dependent upon a single customer, and we do not believe that this event will
have a material adverse effect on our financial condition. In November 2005,
General Motors Corporation, also a large industrial customer of Consumers,
announced plans to reduce manufacturing capacity, including certain operations
in Michigan. We cannot predict the impact of these restructuring plans or
possible future actions by other industrial customers. Continued degradation of
the industrial customer base would have a negative impact on electric utility
revenues.

     ENERGY MARKET DEVELOPMENT: The MISO began operating the Midwest Energy
Market on April 1, 2005. The Midwest Energy Market includes a day-ahead and
real-time energy market and centralized generation dispatch for market
participants. We are a participant in this energy market. The intention of this
market is to meet load requirements in the region reliably and efficiently, to
improve management of congestion on the grid, and to centralize dispatch of
generation throughout the region. The MISO is now responsible for the
reliability

                                      CE-24
<PAGE>

and economic dispatch in the entire MISO area, which covers parts of 15 states
and Manitoba, including our service territory.

     The settlement of charges for each operating day of the Midwest Energy
Market invokes the issuance of multiple settlement statements over a 155-day
period through March 2006 and a 365-day period beginning in April 2006. This
extended settlement period is designed to allow for adjustments associated with
the receipt of complete billing information and other adjustments. When
adjustments are necessary, the MISO bills market participants on a retroactive
basis, covering several months, which may result in either a positive or a
negative billing adjustment. We record an expense accrual for future adjustments
based on historical experience.

     COAL DELIVERY DISRUPTIONS: In May 2005, western coal rail carriers
experienced derailments and significant service disruptions that affected all
shippers of western coal from Wyoming mines as well as coal producers from May
2005 through June 2005. Under contractual Force Majeure provisions, the coal
tonnage not delivered during this period was not made up. Although we
experienced some impact on coal shipments during the rail repair period, our
inventories have remained within historical levels during the winter period,
though at lower levels than planned before the disruptions occurred. Based on
our present delivery experience, projections, and inventory, we believe we will
continue to have adequate coal supply to allow for normal dispatch of our
coal-fired generating units.

     RENEWABLE RESOURCES PROGRAM: In January 2005, in collaboration with the
MPSC, we established a RRP. Under the RRP, we purchase energy from approved
renewable sources, which include solar, wind, geothermal, biomass, and
hydroelectric suppliers. In August 2005, we secured long-term renewable energy
supply contracts that the MPSC approved in October 2005. Customers are able to
participate in the RRP in accordance with tariffs approved by the MPSC. The MPSC
authorized recovery of above-market costs for the RRP by establishing a fund
that consists of an annual contribution from savings generated by the RCP, a
surcharge imposed by the MPSC on all customers, and contributions from customers
that choose to participate in the RRP. In February 2005, the Attorney General
filed appeals of the MPSC orders providing funding for the RRP in the Michigan
Court of Appeals. In November 2005, the Michigan Court of Appeals issued an
order that reversed the portion of the MPSC order that allows a surcharge
imposed on all customers. The RRP will continue to be funded by savings
generated by the RCP and by customers that participate in the program.

     BURIAL OF OVERHEAD POWER LINES: In September 2004, the Michigan Court of
Appeals upheld a lower court decision that requires Detroit Edison to obey a
municipal ordinance enacted by the City of Taylor, Michigan. The ordinance
requires Detroit Edison to bury a section of its overhead power lines at its own
expense. Detroit Edison filed an appeal with the Michigan Supreme Court and, in
October 2005, the Michigan Supreme Court agreed to review the lower court's
decision. Consumers and other industry parties filed a brief in support of
Detroit Edison's appeal. Unless overturned by the Michigan Supreme Court, the
decision could encourage other municipalities to adopt similar ordinances, as
has occurred or is under discussion in a few municipalities in our service
territory. If incurred, we would seek recovery of these costs from our customers
located in the municipality affected, subject to MPSC approval. This case has
potentially broad ramifications for the electric utility industry in Michigan;
however, at this time, we cannot predict the outcome of this matter.

ELECTRIC BUSINESS UNCERTAINTIES

     Several electric business trends or uncertainties may affect our financial
results and condition. These trends or uncertainties have, or we reasonably
expect could have, a material impact on revenues or income from continuing
electric operations.

     ELECTRIC ENVIRONMENTAL ESTIMATES: Our operations are subject to
environmental laws and regulations. Costs to operate our facilities in
compliance with these laws and regulations generally have been recovered in
customer rates.

     Clean Air: Compliance with the federal Clean Air Act and resulting
regulations has been, and will continue to be, a significant focus for us. The
Nitrogen Oxide State Implementation Plan requires significant reductions in

                                      CE-25
<PAGE>

nitrogen oxide emissions. To comply with the regulations, we expect to incur
capital expenditures totaling $815 million. The key assumptions in the capital
expenditure estimate include:

     - construction commodity prices, especially construction material and
       labor,

     - project completion schedules,

     - cost escalation factor used to estimate future years' costs, and

     - allowance for funds used during construction (AFUDC) rate.

     Our current capital cost estimates include an escalation rate of 2.6
percent and an AFUDC capitalization rate of 8.3 percent. As of December 2005, we
had incurred $605 million in capital expenditures to comply with the federal
Clean Air Act and resulting regulations and anticipate that the remaining $210
million of capital expenditures will be made in 2006 through 2011. These
expenditures include installing selective catalytic control reduction technology
at four of our coal-fired electric plants. In addition to modifying coal-fired
electric plants, our compliance plan includes the use of nitrogen oxide emission
allowances until all of the control equipment is operational in 2011. The
nitrogen oxide emission allowance annual expense is projected to be $10 million
per year, which we expect to recover from our customers. The projected annual
expense is based on market price forecasts and forecasts of regulatory
provisions, known as progressive flow control, that restrict the usage in any
given year of allowances banked from previous years. The allowances and their
cost are accounted for as inventory. The allowance inventory is expensed at the
rolling average cost as the coal-fired electric generating units emit nitrogen
oxide. The expense is recovered from our customers through the PSCR process.

     The EPA recently adopted a Clean Air Interstate Rule that requires
additional coal-fired electric plant emission controls for nitrogen oxides and
sulfur dioxide. The rule involves a two-phase program to reduce emissions of
sulfur dioxide by 71 percent and nitrogen oxides by 63 percent by 2015. The
final rule will require that we run our selective catalytic control technology
units year-round beginning in 2009 and may require that we purchase additional
nitrogen oxide allowances beginning in 2009.

     In addition to the selective catalytic control technology installed to meet
the nitrogen oxide standards, our current plan includes installation of flue gas
desulfurization scrubbers. The scrubbers are to be installed by 2014 to meet the
Phase I reduction requirements of the Clean Air Interstate Rule, at costs
similar to those to comply with the nitrogen oxide standards. We currently have
a surplus of sulfur dioxide allowances, which were granted by the EPA and are
accounted for as inventory. In January 2006, we sold some of our excess sulfur
dioxide allowances for $61 million and recognized the proceeds as a regulatory
liability.

     In May 2005, the EPA issued the Clean Air Mercury Rule, which requires
initial reductions of mercury emissions from coal-fired electric power plants by
2010 and further reductions by 2018. While the industry has not reached a
consensus on the technical methods for curtailing mercury emissions, our capital
and operating costs for mercury emissions reductions are expected to be
significantly less than what was required for selective catalytic reduction
technology used for nitrogen oxide compliance.

     In August 2005, the MDEQ filed a Motion to Intervene in a court challenge
to certain aspects of EPA's Clean Air Mercury Rule, asserting that the rule is
inadequate. The MDEQ has not indicated the direction that it will pursue to meet
or exceed the EPA requirements through state rulemaking. We are actively
participating in dialog with the MDEQ regarding potential paths for controlling
mercury emissions and meeting the EPA requirements. In October 2005, the EPA
announced it would reconsider certain aspects of the Clean Air Mercury Rule. We
cannot predict the outcome of this proceeding.

     Several legislative proposals have been introduced in the United States
Congress that would require reductions in emissions of greenhouse gases. We
cannot predict whether any federal mandatory greenhouse gas emission reduction
rules ultimately will be enacted, or the specific requirements of any of these
rules.

     To the extent that greenhouse gas emission reduction rules come into
effect, the mandatory emissions reduction requirements could have far-reaching
and significant implications for the energy sector. We cannot estimate the
potential effect of federal or state level greenhouse gas policy on our future
consolidated results of operations, cash flows, or financial position due to the
uncertain nature of the policies at this time. However, we

                                      CE-26
<PAGE>

stay abreast of and engage in greenhouse gas policy developments and will
continue to assess and respond to their potential implications on our business
operations.

     Water: In March 2004, the EPA issued rules that govern generating plant
cooling water intake systems. The new rules require significant reduction in
fish killed by operating equipment. Some of our facilities will be required to
comply with the new rules by 2007. We currently are performing the required
studies to determine the most cost-effective solutions for compliance.

     For additional details on electric environmental matters, see Note 3,
Contingencies, "Electric Contingencies -- Electric Environmental Matters."

     COMPETITION AND REGULATORY RESTRUCTURING: The Customer Choice Act allows
all of our electric customers to buy electric generation service from us or from
an alternative electric supplier. At December 31, 2005, alternative electric
suppliers were providing 552 MW of generation service to ROA customers. This
amount represents a decrease of 40 percent compared to December 31, 2004, and is
7 percent of our total distribution load. It is difficult to predict future ROA
customer trends.

     Section 10d(4) Regulatory Assets: In October 2004, we filed an application
with the MPSC seeking recovery of $628 million of Section 10d(4) Regulatory
Assets for the period June 2000 through December 2005. Of the $628 million, $152
million relates to the cost of money. In June 2005, the ALJ issued a proposal
for decision recommending the MPSC approve recovery of approximately $323
million in Section 10d(4) costs, which includes the cost of money through the
period of collection. In December 2005, the MPSC issued an order that authorized
us to recover the same costs recommended by the ALJ starting in January 2006.
However, instead of collecting these costs evenly over five years, the order
instructed us to collect 10 percent of the regulatory asset total in the first
year, 15 percent in the second year, and 25 percent in the third, fourth, and
fifth years. As a result, the total amount authorized for collection, including
carrying costs, was $333 million. In January 2006, we filed a petition for
rehearing with the MPSC that disputes the aspect of the order dealing with the
timing of our collection of costs approved for recovery in this case. We cannot
predict the outcome of this petition.

     STRANDED COSTS: Prior MPSC orders adopted a mechanism pursuant to the
Customer Choice Act to provide recovery of Stranded Costs that occur when
customers leave our system to purchase electricity from alternative suppliers.
In November 2005, we filed an application with the MPSC related to the
determination of 2004 Stranded Costs. Applying the Stranded Cost methodology
used in prior MPSC orders, we concluded that we experienced zero Stranded Costs
in 2004.

     IMPLEMENTATION COSTS: In June 2005, the MPSC issued an order that
authorizes us to recover costs from the implementation of the Customer Choice
Act incurred during 2002 and 2003 totaling $6 million, plus the cost of money
through the period of collection. We pursued authorization at the FERC for the
MISO to reimburse us for Alliance RTO development costs. Included in this amount
is $2 million that the MPSC did not approve as part of our 2002 implementation
costs application. The FERC denied our request for reimbursement, and we
appealed the FERC ruling at the United States Court of Appeals for the District
of Columbia. In November 2005, the United States Court of Appeals for the
District of Columbia denied our appeal.

     THROUGH AND OUT RATES: In December 2004, we began paying a transitional
charge pursuant to a FERC order eliminating regional "through and out" rates.
Through and out rates are applied to transmission transactions when a
transmission customer purchases electricity that travels through multiple
transmission pricing zones. Although the transitional charge ends in March 2006,
there are hearings scheduled for May 2006 at the FERC to discuss these charges.
The FERC hearings could result in refunds or additional transitional charges to
us. We cannot predict the outcome of these hearings.

     For additional details and material changes relating to the restructuring
of the electric utility industry and electric rate matters, see Note 3,
Contingencies, "Electric Restructuring Matters," and "Electric Rate Matters."

                                      CE-27
<PAGE>

OTHER ELECTRIC BUSINESS UNCERTAINTIES

     MCV UNDERRECOVERIES: The MCV Partnership, which leases and operates the MCV
Facility, contracted to sell electricity to Consumers for a 35-year period
beginning in 1990. We hold a 49 percent partnership interest in the MCV
Partnership, and a 35 percent lessor interest in the MCV Facility.

     Under the MCV PPA, variable energy payments to the MCV Partnership are
based on the cost of coal burned at our coal plants and our operation and
maintenance expenses. However, the MCV Partnership's costs of producing
electricity are tied to the cost of natural gas. Natural gas prices have
increased substantially in recent years and throughout 2005. In 2005, the MCV
Partnership reevaluated the economics of operating the MCV Facility and recorded
an impairment charge. If natural gas prices remain at present levels or
increase, the operations of the MCV Facility would be adversely affected and
could result in the MCV Partnership failing to meet its obligations under the
sale and leaseback transactions and other contracts. For additional details on
the impairment of the MCV Facility, see Note 2, Asset Impairment Charges. We are
evaluating various alternatives in order to develop a new long-term strategy
with respect to the MCV Facility.

     Further, the cost that we incur under the MCV PPA exceeds the recovery
amount allowed by the MPSC. As a result, we estimate cash underrecoveries of
capacity and fixed energy payments of $55 million in 2006 and $39 million in
2007. However, Consumers' direct savings from the RCP, after allocating a
portion to customers, are used to offset our capacity and fixed energy
underrecoveries expense. After September 15, 2007, we expect to claim relief
under the regulatory out provision in the MCV PPA, thereby limiting our capacity
and fixed energy payments to the MCV Partnership to the amounts that we collect
from our customers. The effect of any such action would be to:

     - reduce cash flow to the MCV Partnership, which could have an adverse
       effect on the MCV Partnership's financial performance, and

     - eliminate our underrecoveries of capacity and fixed energy payments.

     The MCV Partnership has indicated that it may take issue with our exercise
of the regulatory out clause after September 15, 2007. We believe that the
clause is valid and fully effective, but cannot assure that it will prevail in
the event of a dispute. If we are successful in exercising the regulatory out
clause, the MCV Partnership may have the right to terminate the MCV PPA. The
MPSC's future actions on the capacity and fixed energy payments recoverable from
customers subsequent to September 15, 2007 may affect negatively the financial
performance of the MCV Partnership.

     For additional details on the MCV Partnership, see Note 3, Contingencies,
"Other Electric Contingencies -- The Midland Cogeneration Venture."

     NUCLEAR MATTERS:

     Big Rock: Decommissioning of the site is nearing completion. Demolition of
the last remaining plant structure, the containment building, and removal of
remaining underground utilities and temporary office structures is expected to
be completed by the summer of 2006. Final radiological surveys will then be
completed including confirmatory surveys performed by the NRC to ensure that the
site meets all requirements for free, unrestricted release in accordance with
the NRC approved License Termination Plan (LTP) for the project. We anticipate
NRC approval to return approximately 485 acres of the site, including the area
formerly occupied by the nuclear plant, to a natural setting for unrestricted
use by early 2007. We expect another area of approximately 105 acres
encompassing the Big Rock Independent Spent Fuel Storage Installation (ISFSI),
where eight casks loaded with spent fuel and other high-level radioactive
material are stored, to be returned to a natural state within approximately two
years from the date the DOE finishes removing the spent fuel from Big Rock also
in accordance with the LTP.

     Palisades: In August 2005, the NRC completed its performance review of the
Palisades Nuclear Plant for the first half of the calendar year 2005. The NRC
determined that Palisades was operated in a manner that preserved public health
and safety and met all of the NRC's specific "cornerstone objectives." As of
August 2005, all inspection findings were classified as having very low safety
significance and all performance

                                      CE-28
<PAGE>

indicators show performance at a level requiring no additional oversight. Based
on the plant's performance, only regularly scheduled inspections are planned
through March 31, 2007.

     The amount of spent nuclear fuel at Palisades exceeds the plant's temporary
onsite wet storage pool capacity. We are using dry casks for temporary onsite
dry storage to supplement the wet storage pool capacity. As of January 2006, we
have loaded 29 dry casks with spent nuclear fuel.

     Palisades' current license from the NRC expires in 2011. In March 2005, the
NMC, which operates the Palisades plant, applied for a 20-year license renewal
for the plant on behalf of Consumers. Certain parties are seeking to intervene
and have requested a hearing on the application. The NRC has stated that it
expects to take 22-30 months to review a license renewal application. We expect
a decision from the NRC in 2007.

     Palisades, like other nuclear plants, has experienced cracking in reactor
head nozzle penetrations. Repairs to two nozzles were made in 2004. We have
authorized the purchase of a replacement reactor vessel closure head. The
replacement head is being manufactured and is scheduled to be installed in 2007.

     In December 2005, we announced plans to sell the Palisades nuclear plant
and enter into a long-term power purchase agreement with the new owner. We
believe a sale is the best option for our company, as it will reduce risk and
improve cash flow while retaining the benefits of the plant for customers.

     The Palisades sale will use a competitive bid process, providing interested
companies the option to bid on the plant, as well as the related decommissioning
liabilities and trust funds assets, and spent nuclear fuel at Palisades and Big
Rock. We expect to complete the sale in 2007.

     For additional details on nuclear plant decommissioning at Big Rock and
Palisades, see Note 3, Contingencies, "Other Electric Contingencies -- Nuclear
Plant Decommissioning."

GAS BUSINESS OUTLOOK

     GROWTH: Over the next five years, we expect gas deliveries to be relatively
flat. Actual gas deliveries in future periods may be affected by:

     - fluctuations in weather patterns,

     - use by independent power producers,

     - competition in sales and delivery,

     - changes in gas commodity prices,

     - Michigan economic conditions,

     - the price of competing energy sources or fuels, and

     - gas consumption per customer.

     In February 2004, we filed an application with the MPSC for a Certificate
of Public Convenience and Necessity to construct a 25-mile gas transmission
pipeline in northern Oakland County. The project is necessary to meet estimated
peak load beginning in the winter of 2005-2006. We started construction of Phase
I of the pipeline in June 2005. Phase I of the project was completed and put in
service in early December 2005. We anticipate completion of Phase II of the
project in 2008.

     In October 2004, we filed an application with the MPSC for a Certificate of
Public Convenience and Necessity to construct a 10.8-mile gas transmission
pipeline in northwestern Wayne County. The project is necessary to meet the
projected capacity demands beginning in the winter of 2007. In August 2005, the
MPSC issued an order approving the application. Construction of the pipeline is
expected to begin in mid-2006.

GAS BUSINESS UNCERTAINTIES

     Several gas business trends or uncertainties may affect our future
financial results and financial condition. These trends or uncertainties could
have a material impact on revenues or income from gas operations.

                                      CE-29
<PAGE>

     GAS ENVIRONMENTAL ESTIMATES: We expect to incur investigation and remedial
action costs at a number of sites, including 23 former manufactured gas plant
sites. For additional details, see Note 3, Contingencies, "Gas
Contingencies -- Gas Environmental Matters."

     GAS COST RECOVERY: The GCR process is designed to allow us to recover all
of our purchased natural gas costs if incurred under reasonable and prudent
policies and practices. The MPSC reviews these costs for prudency in an annual
reconciliation proceeding. For additional details on gas cost recovery, see Note
3, Contingencies, "Gas Rate Matters -- Gas Cost Recovery."

     2001 GAS DEPRECIATION CASE: In October and December 2004, the MPSC issued
Opinions and Orders in our gas depreciation case, which:

     - reaffirmed the previously ordered $34 million reduction in our
       depreciation expense,

     - required us to undertake a study to determine why our plant removal costs
       are in excess of other regulated Michigan natural gas utilities, and

     - required us to file a study report with the MPSC Staff on or before
       December 31, 2005.

     We filed the study report with the MPSC Staff on December 29, 2005.

     We are also required to file our next gas depreciation case within 90 days
after the MPSC issuance of a final order in the pending case related to ARO
accounting. We expect an MPSC order in the first quarter of 2006.

     If the depreciation case order is issued after the gas general rate case
order, we proposed to incorporate its results into the gas general rates using a
surcharge mechanism.

     2005 GAS RATE CASE: In July 2005, we filed an application with the MPSC
seeking a 12 percent authorized return on equity along with a $132 million
annual increase in our gas delivery and transportation rates. The primary
reasons for the request are recovery of new investments, carrying costs on
natural gas inventory related to higher gas prices, system maintenance, employee
benefits, and low-income assistance. If approved, the request would add
approximately 5 percent to the typical residential customer's average monthly
bill. The increase would also affect commercial and industrial customers.

     As part of this filing, we also requested interim rate relief of $75
million. The MPSC Staff and intervenors filed interim rate relief testimony on
October 31, 2005. In its testimony, the MPSC Staff recommended granting interim
rate relief of $38 million. As of February 2006, the MPSC has not acted on our
interim rate relief request.

     On February 13, 2006, the MPSC Staff recommended granting final rate relief
of $62 million. The MPSC Staff proposed that $17 million of this amount be
contributed to a low income energy efficiency fund. The MPSC Staff also
recommended reducing our return on common equity to 11.15 percent, from our
current 11.4 percent.

     EMERGENCY RULES REGARDING BILLING PRACTICES: On October 18, 2005, the MPSC
issued an order adopting emergency rules for the winter heating period of
November 1, 2005 through March 31, 2006. The rules address billing practices for
retail customers of electric and gas utilities subject to the MPSC's
jurisdiction. The emergency rules are designed to address the increase in
heating costs this winter. They address billing cycles, fees, deposits,
shutoffs, and collection of unpaid bills. The emergency rules will have an
estimated $4 million negative effect on our collections and cash flow in 2006.

OTHER OUTLOOK

     MCV IMPAIRMENT ISSUES: Due to the impairment of the MCV Facility, the
equity held by the minority interest owners of the MCV Partnership has decreased
significantly. Since we have the controlling financial interest in the MCV
Partnership, we will record 100 percent of future losses incurred at the MCV
Partnership, not just our proportionate share.

     The impairment of the MCV Facility, and any potential future impairment of
the MCV Facility, will likely decrease the amount of equity investment
recognized for ratemaking in future electric and gas rate orders. Lower equity
investment may result in a reduced revenue requirement. However, we cannot
predict the outcome of any future rate cases, which may be lower or higher based
on several factors, including the amount of equity
                                      CE-30
<PAGE>

investment and related risk. For additional information on the impairment of the
MCV Facility, see Note 2, Asset Impairment Charges.

     LITIGATION AND REGULATORY INVESTIGATION: CMS Energy is the subject of
various investigations as a result of round-trip trading transactions by CMS
MST, including an investigation by the DOJ. Additionally, CMS Energy and
Consumers are named as parties in a class action lawsuit alleging ERISA
violations. For additional details regarding this investigation and litigation,
see Note 3, Contingencies.

     PENSION REFORM: Both branches of Congress passed legislation aimed at
reforming pension plans. The U.S. Senate passed The Pension Security and
Transparency Act in November 2005 and The House of Representatives passed the
Pension Protection Act of 2005 in December 2005. At the core of both bills are
changes in the calculation of pension plan funding requirements effective for
plan years beginning in 2007, with interest rate relief extended until then, and
an increase in premiums paid to the Pension Benefit Guaranty Corporation (PBGC).
The latter was addressed through the broader budget reconciliation bill, which
raises the PBGC flat-rate premiums from $19 to $30 per participant per year
beginning in 2006. Although the Senate and House bills are similar, they do
contain a number of technical differences, including differences in the time
period allowed for interest rate and asset smoothing, the interest rate used to
calculate lump sum payments, and the criteria used to determine whether a plan
is "at-risk," which requires higher contribution levels. The Senate and the
House plan to work out the differences between the two bills in a joint
conference. The timing, however, of a final pension reform bill is unknown. We
are analyzing the impact of this legislation.

IMPLEMENTATION OF NEW ACCOUNTING STANDARDS

     FASB INTERPRETATION NO. 47, ACCOUNTING FOR CONDITIONAL ASSET RETIREMENT
OBLIGATIONS: This Interpretation became effective for us on December 31, 2005.
It clarifies the term "conditional asset retirement obligation" as used in SFAS
No. 143 and specifies that an obligation to perform the asset retirement
activity is unconditional even though uncertainty exists about the timing and
(or) method of settlement. Upon adoption of this Interpretation, we recorded $36
million of conditional asset retirement obligations relating to asbestos
abatement. Implementation did not impact results of operations due to regulatory
accounting. For additional details, see Note 7, Asset Retirement Obligations.

NEW ACCOUNTING STANDARDS NOT YET EFFECTIVE

     SFAS NO. 123(R) AND SAB NO. 107, SHARE-BASED PAYMENT: SFAS No. 123(R)
requires companies to use the fair value of employee stock options and similar
awards at the grant date to value the awards. Companies must expense this amount
over the vesting period of the awards. This Statement also clarifies and expands
SFAS No. 123's guidance in several areas, including measuring fair value,
classifying an award as equity or as a liability, and attributing compensation
cost to reporting periods including the timing of expense recognition for
share-based awards with terms that accelerate vesting upon retirement. As a
result of these clarifications, future compensation costs for share-based awards
with accelerated vesting provisions upon retirement will need to be fully
expensed by the period in which the employee becomes eligible to retire. At
December 31, 2005, unrecognized compensation cost for such share-based awards
held by retirement eligible employees was not material.

     SFAS No. 123(R) was effective for us on January 1, 2006. We elected to
adopt the modified prospective method recognition provisions of this Statement
instead of retrospective restatement. The modified prospective method applies
the recognition provisions to all awards granted or modified after the adoption
date of this Statement. We adopted the fair value method of accounting for
share-based awards effective December 2002. Therefore, SFAS No. 123(R) did not
have a significant impact on our results of operations when it became effective.
For details regarding current accounting for share-based awards, see Note 9,
Executive Incentive Compensation.

     The SEC issued SAB No. 107 to express the views of the Staff regarding the
interaction between SFAS No. 123(R) and certain SEC rules and regulations. Also,
the SEC issued SAB No. 107 to provide the Staff's views regarding the valuation
of share-based payments, including assumptions such as expected volatility and
expected term. We applied the additional guidance provided by SAB No. 107 upon
implementation of SFAS No. 123(R).
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                                      CE-32
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                            CONSUMERS ENERGY COMPANY
                    CONSOLIDATED STATEMENTS OF INCOME (LOSS)

<Table>
<Caption>
                                                                 YEARS ENDED DECEMBER 31,
                                                                --------------------------
                                                                 2005      2004      2003
                                                                 ----      ----      ----
                                                                      (IN MILLIONS)
<S>                                                             <C>       <C>       <C>
OPERATING REVENUE...........................................    $5,232    $4,711    $4,435
EARNINGS FROM EQUITY METHOD INVESTEES.......................         1         1        42
OPERATING EXPENSES
  Fuel for electric generation..............................       605       701       320
  Fuel costs mark-to-market at MCV..........................      (200)       19        --
  Purchased and interchange power...........................       347       224       310
  Purchased power -- related parties........................        68        67       519
  Cost of gas sold..........................................     1,844     1,468     1,221
  Cost of gas sold -- related parties.......................        --         1        28
  Other operating expenses..................................       841       717       739
  Maintenance...............................................       218       227       199
  Depreciation, depletion, and amortization.................       484       391       377
  General taxes.............................................       214       223       181
  Asset impairment charges..................................     1,184        --        --
                                                                ------    ------    ------
                                                                 5,605     4,038     3,894
                                                                ------    ------    ------
OPERATING INCOME (LOSS).....................................      (372)      674       583
OTHER INCOME (DEDUCTIONS)
  Accretion expense.........................................        (2)       (3)       (7)
  Interest and dividends....................................        45        11         8
  Interest and dividends from affiliates....................        --        --         2
  Gain on asset sales, net..................................        --         1         1
  Regulatory return on capital expenditures.................         4       113        --
  Other income..............................................        20        16        10
  Other expense.............................................       (13)       (7)      (19)
                                                                ------    ------    ------
                                                                    54       131        (5)
                                                                ------    ------    ------
INTEREST CHARGES
  Interest on long-term debt................................       289       284       196
  Interest on long-term debt -- related parties.............        15        44        45
  Other interest............................................         6        13        13
  Capitalized interest......................................       (38)       25        (9)
                                                                ------    ------    ------
                                                                   272       366       245
                                                                ------    ------    ------
INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTERESTS....      (590)      439       333
MINORITY INTERESTS..........................................      (447)        7        --
                                                                ------    ------    ------
INCOME (LOSS) BEFORE INCOME TAXES...........................      (143)      432       333
INCOME TAX (BENEFIT) EXPENSE................................       (47)      152       137
                                                                ------    ------    ------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN
  ACCOUNTING PRINCIPLE......................................       (96)      280       196
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR RETIREMENT
  BENEFITS, NET OF $-- TAX BENEFIT IN 2004..................        --        (1)       --
                                                                ------    ------    ------
NET INCOME (LOSS)...........................................       (96)      279       196
PREFERRED STOCK DIVIDENDS...................................         2         2         2
                                                                ------    ------    ------
NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDER...........    $  (98)   $  277    $  194
                                                                ======    ======    ======
</Table>

        The accompanying notes are an integral part of these statements.

                                      CE-33
<PAGE>

                            CONSUMERS ENERGY COMPANY

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<Table>
<Caption>
                                                               YEARS ENDED DECEMBER 31,
                                                              --------------------------
                                                               2005      2004      2003
                                                               ----      ----      ----
                                                                    (IN MILLIONS)
<S>                                                           <C>       <C>       <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income (loss).........................................  $   (96)  $   279   $  196
     Adjustments to reconcile net income (loss) to net cash
      provided by operating activities
     Depreciation, depletion, and amortization (includes
      nuclear decommissioning of $6 per year)...............      484       391      377
       Regulatory return on capital expenditures............       (4)     (113)      --
       Minority interest....................................     (447)        7
       Fuel costs mark-to-market at MCV.....................     (200)       19
       Asset impairment charges.............................    1,184        --       --
       Capital lease and other amortization.................       34        29       28
       Bad debt expense.....................................       24        20       21
       Gain on sale of assets...............................       --        (1)      (1)
       Loss on CMS Energy stock.............................       --        --       12
       Cumulative effect of changes in accounting...........       --         1       --
       Distributions from related parties in excess of
        earnings............................................       --        --        3
       Pension contribution.................................       --        --     (501)
       Changes in assets and liabilities:
          Increase in accounts receivable and accrued
             revenue........................................     (294)     (112)     (33)
          Increase in inventories...........................     (235)     (126)    (256)
          Increase (decrease) in accounts payable...........      115        44      (61)
          Increase in accrued expenses......................      133        63       13
          Increase in MCV gas supplier funds on deposit.....      173        15       --
          Deferred income taxes and investment tax credit...     (225)      137      195
          Decrease (increase) in other current and
             non-current assets.............................      (20)      (63)      37
          Increase (decrease) in other current and
             non-current liabilities........................       61        50      (25)
                                                              -------   -------   ------
            Net cash provided by operating activities.......      687       640        5
                                                              -------   -------   ------
CASH FLOWS FROM INVESTING ACTIVITIES
  Capital expenditures (excludes assets placed under capital
     lease).................................................     (572)     (508)    (486)
  Cost to retire property...................................      (74)      (73)     (72)
  Restricted cash and restricted short-term investments.....     (162)       (3)      --
  Investments in Electric Restructuring Implementation
     Plan...................................................       --        (7)      (8)
  Investments in nuclear decommissioning trust funds........       (6)       (6)      (6)
  Proceeds from nuclear decommissioning trust funds.........       39        36       34
  Proceeds from short-term investments......................      145     1,048       --
  Purchase of short-term investments........................     (141)   (1,052)      --
  Maturity of MCV restricted investment securities
     held-to-maturity.......................................      318       675       --
  Purchase of MCV restricted investment securities
     held-to-maturity.......................................     (270)     (674)      --
  Cash proceeds from sale of assets.........................        2         2       10
  Other investing...........................................       12        --       --
                                                              -------   -------   ------
            Net cash used in investing activities...........     (709)     (562)    (528)
                                                              -------   -------   ------
</Table>

                                      CE-34
<PAGE>

<Table>
<Caption>
                                                               YEARS ENDED DECEMBER 31,
                                                              --------------------------
                                                               2005      2004      2003
                                                               ----      ----      ----
                                                                    (IN MILLIONS)
<S>                                                           <C>       <C>       <C>
CASH FLOWS FROM FINANCING ACTIVITIES
  Proceeds from issuance of long term debt..................      910     1,055    1,625
  Retirement of long-term debt..............................   (1,028)     (963)    (755)
  Payment of common stock dividends.........................     (277)     (190)    (218)
  Payment of capital and finance lease obligations..........      (29)      (44)     (13)
  Stockholder's contribution, net...........................      700       250       --
  Payment of preferred stock dividends......................       (2)       (2)      (2)
  Increase (decrease) in notes payable, net.................       27      (200)    (257)
  Debt issuance and financing costs.........................      (34)      (33)     (55)
                                                              -------   -------   ------
            Net cash provided by (used in) financing
                activities..................................      267      (127)     325
                                                              -------   -------   ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........      245       (49)    (198)
CASH AND CASH EQUIVALENTS FROM EFFECT OF REVISED FASB
  INTERPRETATION
NO. 46 CONSOLIDATION........................................       --       174       --
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD..............      171        46      244
                                                              -------   -------   ------
CASH AND CASH EQUIVALENTS, END OF PERIOD....................  $   416   $   171   $   46
                                                              =======   =======   ======
OTHER CASH FLOW ACTIVITIES AND NON-CASH INVESTING AND
  FINANCING ACTIVITIES WERE:
CASH TRANSACTIONS
  Interest paid (net of amounts capitalized)................  $   250   $   324   $  227
  Income taxes paid (net of refunds, $8, $50, and $91,
     respectively)..........................................       35       (27)     (56)
  OPEB cash contribution....................................       62        62       71
NON-CASH TRANSACTIONS
  Other assets placed under capital lease...................       12         3       19
</Table>

        The accompanying notes are an integral part of these statements.
                                      CE-35
<PAGE>

                            CONSUMERS ENERGY COMPANY

                          CONSOLIDATED BALANCE SHEETS

<Table>
<Caption>
                                                                   DECEMBER 31,
                                                                ------------------
                                                                 2005       2004
                                                                 ----       ----
                                                                  (IN MILLIONS)
<S>                                                             <C>        <C>
ASSETS
PLANT AND PROPERTY (AT COST)
  Electric..................................................    $ 8,204    $ 7,967
  Gas.......................................................      3,151      2,995
  Other.....................................................        227      2,523
                                                                -------    -------
                                                                 11,582     13,485
  Less accumulated depreciation, depletion, and
     amortization...........................................      4,804      5,665
                                                                -------    -------
                                                                  6,778      7,820
  Construction work-in-progress.............................        509        353
                                                                -------    -------
                                                                  7,287      8,173
                                                                -------    -------
INVESTMENTS
  Stock of affiliates.......................................         33         25
  Other.....................................................          7         19
                                                                -------    -------
                                                                     40         44
                                                                -------    -------
CURRENT ASSETS
  Cash and cash equivalents at cost, which approximates
     market.................................................        416        171
  Short-term investments at cost, which approximates
     market.................................................         --          4
  Restricted cash and restricted short-term investments.....        183         21
  Accounts receivable, notes receivable, and accrued
     revenue, less allowances of $13 in 2005 and $10 in
     2004...................................................        653        374
  Accounts receivable -- related parties....................          9         18
  Inventories at average cost
     Gas in underground storage.............................      1,068        855
     Materials and supplies.................................         75         67
     Generating plant fuel stock............................         80         66
  Deferred property taxes...................................        159        165
  Regulatory assets -- postretirement benefits..............         19         19
  Derivative instruments....................................        242         96
  Prepayments and other.....................................         70         95
                                                                -------    -------
                                                                  2,974      1,951
                                                                -------    -------
NON-CURRENT ASSETS
  Regulatory assets
     Securitized costs......................................        560        604
     Additional minimum pension.............................        399        372
     Postretirement benefits................................        116        139
     Customer Choice Act....................................        222        171
     Other..................................................        484        391
  Nuclear decommissioning trust funds.......................        555        575
  Other.....................................................        520        391
                                                                -------    -------
                                                                  2,856      2,643
                                                                -------    -------
TOTAL ASSETS................................................    $13,157    $12,811
                                                                =======    =======
</Table>

                                      CE-36
<PAGE>

<Table>
<Caption>
                                                                   DECEMBER 31,
                                                                ------------------
                                                                 2005       2004
                                                                 ----       ----
                                                                  (IN MILLIONS)
<S>                                                             <C>        <C>
STOCKHOLDER'S INVESTMENT AND LIABILITIES
CAPITALIZATION
  Common stockholder's equity
     Common stock, authorized 125.0 shares; outstanding 84.1
      shares for all periods................................    $   841    $   841
     Paid-in capital........................................      1,632        932
     Accumulated other comprehensive income.................         72         31
     Retained earnings since December 31, 1992..............        233        608
                                                                -------    -------
                                                                  2,778      2,412
  Preferred stock...........................................         44         44
  Long-term debt............................................      4,303      4,000
  Long-term debt -- related parties.........................         --        326
  Non-current portion of capital leases and finance lease
     obligations............................................        308        315
                                                                -------    -------
                                                                  7,433      7,097
                                                                -------    -------
MINORITY INTERESTS..........................................        259        657
                                                                -------    -------
CURRENT LIABILITIES
  Current portion of long-term debt, capital leases and
     finance leases.........................................        112        147
  Current portion of long-term debt -- related parties......        129        180
  Notes payable -- related parties..........................         27         --
  Accounts payable..........................................        372        267
  Accounts payable -- related parties.......................         25         14
  Accrued interest..........................................         82         83
  Accrued taxes.............................................        400        254
  Deferred income taxes.....................................         55         20
  MCV gas supplier funds on deposit.........................        193         20
  Other.....................................................        251        218
                                                                -------    -------
                                                                  1,646      1,203
                                                                -------    -------
NON-CURRENT LIABILITIES
  Deferred income taxes.....................................      1,027      1,274
  Regulatory Liabilities
  Regulatory liabilities for cost of removal................      1,120      1,044
  Income taxes, net.........................................        455        433
  Other regulatory liabilities..............................        178        173
  Postretirement benefits...................................        308        207
  Asset retirement obligations..............................        494        436
  Deferred investment tax credit............................         67         79
  Other.....................................................        170        208
                                                                -------    -------
                                                                  3,819      3,854
                                                                -------    -------
Commitments and Contingencies (Notes 3, 4, 5, 8, and 10)
TOTAL STOCKHOLDER'S INVESTMENT AND LIABILITIES..............    $13,157    $12,811
                                                                =======    =======
</Table>

        The accompanying notes are an integral part of these statements.
                                      CE-37
<PAGE>

                            CONSUMERS ENERGY COMPANY

             CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY

<Table>
<Caption>
                                                                 YEARS ENDED DECEMBER 31,
                                                                --------------------------
                                                                 2005      2004      2003
                                                                 ----      ----      ----
                                                                      (IN MILLIONS)
<S>                                                             <C>       <C>       <C>
COMMON STOCK
  At beginning and end of period(a).........................    $  841    $  841    $  841
                                                                ------    ------    ------
OTHER PAID-IN CAPITAL
  At beginning of period....................................       932       682       682
  Stockholder's contribution................................       700       250        --
                                                                ------    ------    ------
  At end of period..........................................     1,632       932       682
                                                                ------    ------    ------
ACCUMULATED OTHER COMPREHENSIVE INCOME
  Minimum pension liability
     At beginning of period.................................        (1)       --      (185)
     Minimum pension liability adjustments(b)...............        (1)       (1)      185
                                                                ------    ------    ------
       At end of period.....................................        (2)       (1)       --
                                                                ------    ------    ------
  Investments
     At beginning of period.................................        12         9         1
     Unrealized gain on investments(b)......................         6         3         8
                                                                ------    ------    ------
       At end of period.....................................        18        12         9
                                                                ------    ------    ------
  Derivative instruments
     At beginning of period.................................        20         8         5
     Unrealized gain on derivative instruments(b)...........        53        23        13
     Reclassification adjustments included in net income
      (loss)(b).............................................       (17)      (11)      (10)
                                                                ------    ------    ------
       At end of period.....................................        56        20         8
                                                                ------    ------    ------
Total Accumulated Other Comprehensive Income................        72        31        17
                                                                ------    ------    ------
RETAINED EARNINGS
  At beginning of period....................................       608       521       545
  Net income (loss).........................................       (96)      279       196
  Cash dividends declared -- Common Stock...................      (277)     (190)     (218)
  Cash dividends declared -- Preferred Stock................        (2)       (2)       (2)
                                                                ------    ------    ------
  At end of period..........................................       233       608       521
                                                                ------    ------    ------
TOTAL COMMON STOCKHOLDER'S EQUITY...........................    $2,778    $2,412    $2,061
                                                                ======    ======    ======
</Table>

-------------------------
(a)  Number of shares of common stock outstanding was 84,108,789 for all periods
     presented.

                                      CE-38
<PAGE>

(b)  Disclosure of Other Comprehensive Income:

<Table>
<Caption>
                                                                     YEARS ENDED
                                                                    DECEMBER 31,
                                                                ---------------------
                                                                2005    2004    2003
                                                                ----    ----    ----
                                                                 (IN MILLIONS 2003)
<S>                                                             <C>     <C>     <C>
Minimum pension liability
  Minimum pension liability adjustment, net of tax (tax
     benefit) of $- in 2005, $(1) in 2004, and $100 in
     2003...................................................    $ (1)   $ (1)   $ 185
Investments
  Unrealized gain on investments, net of tax of $3 in 2005,
     $2 in 2004, and $4 in 2003.............................       6       3        8
Derivative instruments
  Unrealized gain on derivative instruments, net of tax of
     $28 in 2005, $12 in 2004, and $7 in 2003...............      53      23       13
  Reclassification adjustments included in net income
     (loss), net of tax benefit of $(10) in 2005, $(6) in
     2004, and $(5) in 2003.................................     (17)    (11)     (10)
Net income (loss)...........................................     (96)    279      196
                                                                ----    ----    -----
Total Comprehensive Income (Loss)...........................    $(55)   $293    $ 392
                                                                ====    ====    =====
</Table>

        The accompanying notes are an integral part of these statements.
                                      CE-39
<PAGE>

                      (This page intentionally left blank)

                                      CE-40
<PAGE>

                            CONSUMERS ENERGY COMPANY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1: CORPORATE STRUCTURE AND ACCOUNTING POLICIES

     CORPORATE STRUCTURE: Consumers, a subsidiary of CMS Energy, a holding
company, is a combination electric and gas utility company serving Michigan's
Lower Peninsula. Our customer base includes a mix of residential, commercial,
and diversified industrial customers, the largest segment of which is the
automotive industry. We manage our business by the nature of services each
provides and operate principally in two business segments: electric utility and
gas utility.

     PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
Consumers, and all other entities in which we have a controlling financial
interest or are the primary beneficiary, in accordance with Revised FASB
Interpretation No. 46. We use the equity method of accounting for investments in
companies and partnerships that are not consolidated, where we have significant
influence over operations and financial policies, but are not the primary
beneficiary. We eliminate intercompany transactions and balances.

     USE OF ESTIMATES: We prepare our consolidated financial statements in
conformity with U.S. generally accepted accounting principles. We are required
to make estimates using assumptions that may affect the reported amounts and
disclosures. Actual results could differ from those estimates.

     We are required to record estimated liabilities in the consolidated
financial statements when it is probable that a loss will be incurred in the
future as a result of a current event, and when the amount can be reasonably
estimated. We have used this accounting principle to record estimated
liabilities as discussed in Note 3, Contingencies.

     REVENUE RECOGNITION POLICY: We recognize revenues from deliveries of
electricity and natural gas, and the storage of natural gas when services are
provided. Sales taxes are recorded as liabilities and are not included in
revenues.

     ACCOUNTING FOR MISO TRANSACTIONS: We account for MISO transactions on a net
basis for all of our generating units combined. We record billing adjustments
when invoices are received and an expense accrual for future adjustments based
on historical experience.

     CAPITALIZED INTEREST: We are required to capitalize interest on certain
qualifying assets that are undergoing activities to prepare them for their
intended use. Capitalization of interest for the period is limited to the actual
interest cost that is incurred. Our regulated businesses are permitted to
capitalize an allowance for funds used during construction on regulated
construction projects and to include such amounts in plant in service.

     CASH EQUIVALENTS, RESTRICTED CASH AND RESTRICTED SHORT-TERM
INVESTMENTS: All highly liquid investments with an original maturity of three
months or less are considered cash equivalents.

     At December 31, 2005, our restricted cash and restricted short-term
investments on hand was $183 million. Restricted cash dedicated for repayment of
Securitization bonds is classified as a current asset, as the payments on the
related Securitization bonds occur within one year. Restricted short-term
investments consist of $128 million of U.S. Treasury securities deposited with a
trustee for the purpose of extinguishing the current portion of long-term
debt -- related parties. These investments have original maturity dates of less
than one year and, because of their short-term maturities, carrying amounts
approximate fair value.

     COLLECTIVE BARGAINING AGREEMENTS: At December 31, 2005, approximately 45
percent of our employees were represented by the Utility Workers of America
Union. The Union represents Consumers' operating, maintenance, and construction
employees and our call center employees.

     FINANCIAL AND DERIVATIVE INSTRUMENTS: We account for investments in debt
and equity securities using SFAS No. 115. Debt and equity securities classified
as available-for-sale are reported at fair value determined from quoted market
prices. Debt and equity securities classified as held-to-maturity are reported
at cost.

                                      CE-41
<PAGE>
                            CONSUMERS ENERGY COMPANY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     Unrealized gains or losses resulting from changes in fair value of certain
available-for-sale debt and equity securities are reported, net of tax, in
equity as part of accumulated other comprehensive income. Unrealized gains or
losses are excluded from earnings unless the related changes in fair value are
determined to be other than temporary. Unrealized gains or losses on our nuclear
decommissioning investments are reflected as regulatory liabilities on our
Consolidated Balance Sheets. Realized gains or losses would not affect our
earnings or cash flows.

     We account for derivative instruments using SFAS No. 133. Derivatives are
reported on the balance sheet at their fair value. Changes in fair value are
recorded to accumulated other comprehensive income if the derivative qualifies
for cash flow hedge accounting; otherwise, the changes are recorded to earnings.

     For additional details regarding financial and derivative instruments, see
Note 5, Financial and Derivative Instruments.

     GAS INVENTORY: We use the weighted average cost method for valuing working
gas and recoverable cushion gas in underground storage facilities.

     GENERATING PLANT FUEL STOCK INVENTORY: We use the weighted average cost
method for valuing coal inventory and classify these costs as generating plant
fuel stock on our Consolidated Balance Sheets. The MCV Partnership's natural gas
inventory, also included in this category, is stated at the lower of cost or
market and valued using the last-in, first-out (LIFO) method. The amount of
reserve to reduce the MCV Partnership's inventory from the first-in, first-out
(FIFO) basis to the LIFO basis was $15 million at December 31, 2005 and $10
million at December 31, 2004. Inventory cost determined on a FIFO basis
approximates current replacement cost.

     IMPAIRMENT OF INVESTMENTS AND LONG-LIVED ASSETS: We evaluate the potential
impairment of our investments and other long-lived assets, other than goodwill,
based on various analyses, including the projection of undiscounted cash flows,
whenever events or changes in circumstances indicate that the carrying amount of
the investment or asset may not be recoverable. If the carrying amount of the
investment or asset exceeds its estimated undiscounted future cash flows, an
impairment loss is recognized and the investment or asset is written down to its
estimated fair value. For additional details, see Note 2, Asset Impairment
Charges.

     MAINTENANCE AND DEPRECIATION: We charge property repairs and minor property
replacements to maintenance expense. We also charge planned major maintenance
activities to operating expense unless the cost represents the acquisition of
additional components or the replacement of an existing component. We capitalize
the cost of plant additions and replacements. We depreciate utility property
using straight-line rates approved by the MPSC. The composite depreciation rates
for our properties are:

<Table>
<Caption>
YEARS ENDED DECEMBER 31                                         2005    2004    2003
-----------------------                                         ----    ----    ----
<S>                                                             <C>     <C>     <C>
Electric utility property...................................    3.1%    3.1%    3.1%
Gas utility property........................................    3.6%    3.7%    4.6%
Other property..............................................    7.6%    8.4%    8.1%
</Table>

     NUCLEAR FUEL COST: We amortize nuclear fuel cost to fuel expense based on
the quantity of heat produced for electric generation. For nuclear fuel used
after April 6, 1983, we charge certain disposal costs to nuclear fuel expense,
recover these costs through electric rates, and remit them to the DOE quarterly.
We elected to defer payment for disposal of spent nuclear fuel burned before
April 7, 1983. Our DOE liability is $145 million at December 31, 2005 and $141
million at December 31, 2004. This amount includes interest, which is payable
upon the first delivery of spent nuclear fuel to the DOE. The amount of this
liability, excluding a portion of interest, was recovered through electric
rates. For additional details on disposal of spent nuclear fuel, see Note 3,
Contingencies, "Other Electric Contingencies -- Nuclear Matters."

                                      CE-42
<PAGE>
                            CONSUMERS ENERGY COMPANY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     OTHER INCOME AND OTHER EXPENSE: The following tables show the components of
Other income and Other expense:

<Table>
<Caption>
YEARS ENDED DECEMBER 31                                         2005    2004    2003
-----------------------                                         ----    ----    ----
                                                                   (IN MILLIONS)
<S>                                                             <C>     <C>     <C>
Other income
  Electric restructuring return.............................    $ 6     $ 6     $ 8
  Return on stranded and security costs.....................      6       9      --
  Nitrogen oxide allowance sales............................      2      --      --
  Gain on stock.............................................      1      --      --
  All other.................................................      5       1       2
                                                                ---     ---     ---
Total other income..........................................    $20     $16     $10
                                                                ===     ===     ===
</Table>

<Table>
<Caption>
YEARS ENDED DECEMBER 31                                         2005    2004    2003
-----------------------                                         ----    ----    ----
                                                                   (IN MILLIONS)
<S>                                                             <C>     <C>     <C>
Other expense
  Loss on reacquired debt...................................    $ (6)   $--     $ --
  Civic and political expenditures..........................      (2)    (2)      (2)
  Loss on CMS Energy stock..................................      --     --      (12)
  Loss on SERP investment...................................      (1)    (1)      (1)
  All other.................................................      (4)    (4)      (4)
                                                                ----    ---     ----
Total other expense.........................................    $(13)   $(7)    $(19)
                                                                ====    ===     ====
</Table>

     PROPERTY, PLANT, AND EQUIPMENT: We record property, plant, and equipment at
original cost when placed into service. When regulated assets are retired, or
otherwise disposed of in the ordinary course of business, the original cost is
charged to accumulated depreciation, along with associated cost of removal net
of salvage. Cost of removal collected from our customers, but not spent, is
recorded as a regulatory liability. An allowance for funds used during
construction is capitalized on regulated construction projects. With respect to
the retirement or disposal of non-regulated assets, the resulting gains or
losses are recognized in income. For additional details, see Note 7, Asset
Retirement Obligations and Note 11, Property, Plant, and Equipment.

     RECLASSIFICATIONS: Certain prior year amounts have been reclassified for
comparative purposes. These reclassifications did not affect consolidated net
income for the years presented.

     RELATED PARTY TRANSACTIONS: We received income from related parties as
follows:

<Table>
<Caption>
TYPE OF INCOME                                                 RELATED PARTY         2005    2004    2003
--------------                                                 -------------         ----    ----    ----
                                                                                        (IN MILLIONS)
<S>                                                        <C>                       <C>     <C>     <C>
Gas sales, storage, transportation and other
  services(a)..........................................    MCV Partnership           $--     $--     $17
Income from our investments in related party
  trusts(b)............................................    Consumers' affiliated       1       1       2
                                                           Trust Preferred
                                                           Securities companies
</Table>

                                      CE-43
<PAGE>
                            CONSUMERS ENERGY COMPANY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     We recorded expense from related parties as follows:

<Table>
<Caption>
TYPE OF COST                                       RELATED PARTY                2005    2004     2003
------------                                       -------------                ----    ----     ----
                                                                                    (IN MILLIONS)
<S>                                     <C>                                     <C>     <C>      <C>
Electric generating capacity and
  energy(a).........................    MCV Partnership                         $--     $ --     $455
Electric generating capacity and
  energy............................    Affiliates of Enterprises                68       67       64
Interest expense on long-term
  debt(b)...........................    Consumers' affiliated Trust
                                        Preferred Securities companies           15       44       45
Gas purchases.......................    CMS ERM                                  --        1       27
Overhead expense(c).................    CMS Energy parent company                 1       --        8
Gas transportation(d)...............    Panhandle/Trunkline                      --       --        1
Gas transportation..................    CMS Bay Area Pipeline, L.L.C.             4        4        4
</Table>

-------------------------
(a)  In 2004, we consolidated the MCV Partnership and the FMLP into our
     consolidated financial statements in accordance with Revised FASB
     Interpretation No. 46. For additional details, see Note 14, Consolidation
     of Variable Interest Entities.

(b)  We issued Trust Preferred Securities through several Consumers' affiliated
     companies. At December 31, 2003, we deconsolidated the trusts that hold the
     mandatorily redeemable Trust Preferred Securities. As a result, we now
     record on the Consolidated Statements of Income, Interest on Long-term
     debt -- related parties to the trusts holding the Trust Preferred
     Securities.

(c)  We base our related party transactions on regulated prices, market prices,
     or competitive bidding. We pay overhead costs to CMS Energy based on an
     industry allocation methodology, such as the Massachusetts Formula.

(d)  Panhandle was sold in June 2003.

     We own 2.3 million shares of CMS Energy Common Stock with a fair value of
$33 million at December 31, 2005. For additional details on our investment in
CMS Energy Common Stock, see Note 5, Financial and Derivative Instruments.

     TRADE RECEIVABLES: We record our accounts receivable at fair value.
Accounts deemed uncollectible are charged to operating expense.

     UNAMORTIZED DEBT PREMIUM, DISCOUNT, AND EXPENSE: We capitalize premiums,
discounts, and expenses incurred in connection with the issuance of long-term
debt and amortize those costs over the terms of the debt issues. Any refinancing
costs are charged to expenses as incurred. For the regulated portions of our
businesses, if we refinance debt, we capitalize any remaining unamortized
premiums, discounts, and expenses and amortize them over the terms of the newly
issued debt.

     UTILITY REGULATION: We account for the effects of regulation based on the
regulated utility accounting standard SFAS No. 71. As a result, the actions of
regulators affect when we recognize revenues, expenses, assets, and liabilities.

     We reflect the following regulatory assets and liabilities, which include
both current and non-current amounts, on our Consolidated Balance Sheets. We
expect to recover these costs through rates over periods of up

                                      CE-44
<PAGE>
                            CONSUMERS ENERGY COMPANY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

to 14 years. We recognized an OPEB transition obligation in accordance with SFAS
No. 106 and established a regulatory asset for the amount that we expect to
recover in rates over the next seven years.

<Table>
<Caption>
DECEMBER 31                                                      2005      2004
-----------                                                      ----      ----
                                                                 (IN MILLIONS)
<S>                                                             <C>       <C>
Securitized costs (Note 4)..................................    $  560    $  604
Postretirement benefits (Note 6)............................       135       158
Additional minimum pension liability (Note 6)...............       399       372
Electric Restructuring Implementation Plan (Note 3).........        74        88
Manufactured gas plant sites (Note 3).......................        62        65
Abandoned Midland project...................................         9        10
Unamortized debt costs......................................        93        71
Asset retirement obligations (Note 7).......................       169        83
Stranded costs (Note 3).....................................        63        63
Customer Choice Act (Note 3)................................       222       171
Other.......................................................        14        11
                                                                ------    ------
Total regulatory assets(a)..................................    $1,800    $1,696
                                                                ======    ======
Cost of removal (Note 7)....................................    $1,120    $1,044
Income taxes, net (Note 8)..................................       455       433
Asset retirement obligations (Note 7).......................       165       168
Other.......................................................        13         5
                                                                ------    ------
Total regulatory liabilities(a).............................    $1,753    $1,650
                                                                ======    ======
</Table>

-------------------------
(a)  At December 31, 2005, we classified $19 million of regulatory assets as
     current regulatory assets and we classified $1.781 billion of regulatory
     assets as non-current regulatory assets. At December 31, 2004, we
     classified $19 million of regulatory assets as current regulatory assets
     and we classified $1.677 billion of regulatory assets as non-current
     regulatory assets. At December 31, 2005 and December 31, 2004, all of our
     regulatory liabilities represented non-current regulatory liabilities.

2: ASSET IMPAIRMENT CHARGES

     The MCV Partnership's costs of producing electricity are tied to the price
of natural gas, but its revenues do not vary with changes in the price of
natural gas. In 2005, NYMEX forward natural gas price forecasts for the years
2005 through 2010 increased substantially. Additionally, other independent
natural gas long-term forward price forecasting organizations indicated their
intention to raise their forecasts for the price of natural gas generally over
the entire long-term forecast horizon beyond 2010. Our analysis and assessment
of this information suggested that forward natural gas prices for the period
from 2006 through 2010 could average approximately $9 per mcf. Further, this
information indicated that natural gas prices could average approximately $6.50
per mcf over the long term beyond 2010. As a result, in 2005, the MCV
Partnership reevaluated the economics of operating the MCV Facility and
determined that an impairment analysis, considering revised forward natural gas
price assumptions, was required. In its impairment analysis, the MCV Partnership
determined the fair value of its fixed assets by discounting a set of
probability-weighted streams of future operating cash flows at a 4.3 percent
risk free interest rate. The carrying value of the MCV Partnership's fixed
assets exceeded the estimated fair value resulting in an impairment charge of
$1.159 billion to recognize the reduction in fair value of the MCV Facility's
fixed assets. As a result, our 2005 net income was reduced by $369 million after
accounting for minority interests and tax effects. After reflecting the
impairment charge, the MCV Partnership's fixed assets, which are included on our
Consolidated Balance Sheets, are valued at $224 million at December 31, 2005.

     If natural gas prices remain at present levels or increase, the operations
of the MCV Facility would be adversely affected, which could result in the MCV
Partnership failing to meet its obligations under the sale and

                                      CE-45
<PAGE>
                            CONSUMERS ENERGY COMPANY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

leaseback transactions, and other contracts and could result in an impairment of
the FMLP. At December 31, 2005, our investment in the FMLP was $235 million.

     Our 49 percent interest in the MCV Partnership is held through our
wholly-owned subsidiary, CMS Midland. The severe adverse change in the
anticipated economics of the MCV Partnership operations discussed within this
Note also led to our decision to impair certain assets carried on the balance
sheet of CMS Midland. These assets represented interest capitalized during the
construction of the MCV Facility, which were being amortized over the life of
the MCV Facility. In the third quarter of 2005, we recorded an impairment charge
of $25 million ($16 million, net of tax) to reduce the carrying amount of these
assets to zero.

     The total of the CMS Midland impairment and the MCV Partnership impairment
discussed above is $1.184 billion, before tax, and $385 million net of taxes and
minority interest.

3: CONTINGENCIES

     SEC AND OTHER INVESTIGATIONS: As a result of round-trip trading
transactions by CMS MST, CMS Energy's Board of Directors established a Special
Committee to investigate matters surrounding the transactions and retained
outside counsel to assist in the investigation. The Special Committee completed
its investigation and reported its findings to the Board of Directors in October
2002. The Special Committee concluded, based on an extensive investigation, that
the round-trip trades were undertaken to raise CMS MST's profile as an energy
marketer with the goal of enhancing its ability to promote its services to new
customers. The Special Committee found no effort to manipulate the price of CMS
Energy Common Stock or affect energy prices. The Special Committee also made
recommendations designed to prevent any recurrence of this practice. Previously,
CMS Energy terminated its speculative trading business and revised its risk
management policy. The Board of Directors adopted, and CMS Energy implemented,
the recommendations of the Special Committee.

     CMS Energy is cooperating with an investigation by the DOJ concerning
round-trip trading, which the DOJ commenced in May 2002. CMS Energy is unable to
predict the outcome of this matter and what effect, if any, this investigation
will have on its business. In March 2004, the SEC approved a cease-and-desist
order settling an administrative action against CMS Energy related to round-trip
trading. The order did not assess a fine and CMS Energy neither admitted nor
denied the order's findings. The settlement resolved the SEC investigation
involving CMS Energy and CMS MST. Also in March 2004, the SEC filed an action
against three former employees related to round-trip trading by CMS MST. One of
the individuals has settled with the SEC. CMS Energy is currently advancing
legal defense costs for the remaining two individuals, in accordance with
existing indemnification policies.

     SECURITIES CLASS ACTION LAWSUITS: Beginning on May 17, 2002, a number of
complaints were filed against CMS Energy, Consumers, and certain officers and
directors of CMS Energy and its affiliates, including but not limited to
Consumers which, while established, operated and regulated as a separate legal
entity and publicly traded company, shares a parallel Board of Directors with
CMS Energy. The complaints were filed as purported class actions in the United
States District Court for the Eastern District of Michigan, by shareholders who
allege that they purchased CMS Energy's securities during a purported class
period running from May 2000 through March 2003. The cases were consolidated
into a single lawsuit. The consolidated lawsuit generally seeks unspecified
damages based on allegations that the defendants violated United States
securities laws and regulations by making allegedly false and misleading
statements about CMS Energy's business and financial condition, particularly
with respect to revenues and expenses recorded in connection with round-trip
trading by CMS MST. In January 2005, a motion was granted, dismissing Consumers
and three of the individual defendants, but the court denied the motions to
dismiss for CMS Energy and the 13 remaining individual defendants. Plaintiffs
filed a motion for class certification on April 15, 2005 and an amended motion
for class certification on June 20, 2005. The hearing on this motion is
scheduled for February 28, 2006. On September 20, 2005, CMS Energy filed a
motion for judgment on the pleadings, based on the Dura Pharmaceuticals decision
issued by the United States Supreme Court. Plaintiffs filed their response on
October 25, 2005, along with a so-called "cross-
                                      CE-46
<PAGE>
                            CONSUMERS ENERGY COMPANY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

motion for partial summary judgment" seeking a determination that CMS Energy is
liable for all damages proximately caused by its "culpable conduct." On November
29, 2005, the judge issued a decision denying both CMS Energy's motion for
judgment on the pleadings and plaintiffs' cross-motion for partial summary
judgment. CMS Energy and the individual defendants will defend themselves
vigorously in this litigation but cannot predict its outcome.

     ERISA LAWSUITS: CMS Energy is a named defendant, along with Consumers, CMS
MST, and certain named and unnamed officers and directors, in two lawsuits
brought as purported class actions on behalf of participants and beneficiaries
of the CMS Employees' Savings and Incentive Plan (the Plan). The two cases,
filed in July 2002 in United States District Court for the Eastern District of
Michigan, were consolidated by the trial judge and an amended consolidated
complaint was filed. Plaintiffs allege breaches of fiduciary duties under ERISA
and seek restitution on behalf of the Plan with respect to a decline in value of
the shares of CMS Energy Common Stock held in the Plan. Plaintiffs also seek
other equitable relief and legal fees. The judge has conditionally granted
plaintiffs' motion for class certification. A trial date has not been set, but
is expected to be no earlier than mid-2006 in the absence of an intervening
settlement of the lawsuits. Settlement negotiations among counsel for the
parties and CMS Energy's fiduciary insurance carrier are ongoing. In the absence
of such a settlement, CMS Energy and Consumers will defend themselves vigorously
in this litigation but cannot predict its outcome.

ELECTRIC CONTINGENCIES

     ELECTRIC ENVIRONMENTAL MATTERS: Our operations are subject to environmental
laws and regulations. Costs to operate our facilities in compliance with these
laws and regulations generally have been recovered in customer rates.

     Clean Air: Compliance with the federal Clean Air Act and resulting
regulations has been, and will continue to be, a significant focus for us. The
Nitrogen Oxide State Implementation Plan requires significant reductions in
nitrogen oxide emissions. To comply with the regulations, we expect to incur
capital expenditures totaling $815 million. The key assumptions in the capital
expenditure estimate include:

     - construction commodity prices, especially construction material and
       labor,

     - project completion schedules,

     - cost escalation factor used to estimate future years' costs, and

     - allowance for funds used during construction (AFUDC) rate.

     Our current capital cost estimates include an escalation rate of 2.6
percent and an AFUDC capitalization rate of 8.3 percent. As of December 2005, we
had incurred $605 million in capital expenditures to comply with the federal
Clean Air Act and resulting regulations and anticipate that the remaining $210
million of capital expenditures will be made in 2006 through 2011. These
expenditures include installing selective catalytic control reduction technology
at four of our coal-fired electric plants. In addition to modifying coal-fired
electric plants, our compliance plan includes the use of nitrogen oxide emission
allowances until all of the control equipment is operational in 2011. The
nitrogen oxide emission allowance annual expense is projected to be $10 million
per year, which we expect to recover from our customers. The projected annual
expense is based on market price forecasts and forecasts of regulatory
provisions, known as progressive flow control, that restrict the usage in any
given year of allowances banked from previous years. The allowances and their
cost are accounted for as inventory. The allowance inventory is expensed at the
rolling average cost as the coal-fired electric generating units emit nitrogen
oxide. The expense is recovered from our customers through the PSCR process.

     The EPA recently adopted a Clean Air Interstate Rule that requires
additional coal-fired electric plant emission controls for nitrogen oxides and
sulfur dioxide. The rule involves a two-phase program to reduce emissions of
sulfur dioxide by 71 percent and nitrogen oxides by 63 percent by 2015. The
final rule will require
                                      CE-47
<PAGE>
                            CONSUMERS ENERGY COMPANY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

that we run our selective catalytic control technology units year round
beginning in 2009 and may require that we purchase additional nitrogen oxide
allowances beginning in 2009.

     In addition to the selective catalytic control technology installed to meet
the nitrogen oxide standards, our current plan includes installation of flue gas
desulfurization scrubbers. The scrubbers are to be installed by 2014 to meet the
Phase I reduction requirements of the Clean Air Interstate Rule, at costs
similar to those to comply with the nitrogen oxide standards. We currently have
a surplus of sulfur dioxide allowances, which were granted by the EPA and are
accounted for as inventory. In January 2006, we sold some of our excess sulfur
dioxide allowances for $61 million and recognized the proceeds as a regulatory
liability.

     In May 2005, the EPA issued the Clean Air Mercury Rule, which requires
initial reductions of mercury emissions from coal-fired electric power plants by
2010 and further reductions by 2018. While the industry has not reached a
consensus on the technical methods for curtailing mercury emissions, our capital
and operating costs for mercury emissions reductions are expected to be
significantly less than what was required for selective catalytic reduction
technology used for nitrogen oxide compliance.

     In August 2005, the MDEQ filed a Motion to Intervene in a court challenge
to certain aspects of EPA's Clean Air Mercury Rule, asserting that the rule is
inadequate. The MDEQ has not indicated the direction that it will pursue to meet
or exceed the EPA requirements through state rulemaking. We are actively
participating in dialog with the MDEQ regarding potential paths for controlling
mercury emissions and meeting the EPA requirements. In October 2005, the EPA
announced it would reconsider certain aspects of the Clean Air Mercury Rule. We
cannot predict the outcome of this proceeding.

     The EPA has alleged that some utilities have incorrectly classified plant
modifications as "routine maintenance" rather than seeking modification permits
from the EPA. We have received and responded to information requests from the
EPA on this subject. We believe that we have properly interpreted the
requirements of "routine maintenance." If our interpretation is found to be
incorrect, we may be required to install additional pollution controls at some
or all of our coal-fired electric plants and potentially pay fines.
Additionally, the viability of certain plants remaining in operation could be
called into question.

     Cleanup and Solid Waste: Under the Michigan Natural Resources and
Environmental Protection Act, we expect that we will ultimately incur
investigation and remedial action costs at a number of sites. We believe that
these costs will be recoverable in rates under current ratemaking policies.

     We are a potentially responsible party at several contaminated sites
administered under Superfund. Superfund liability is joint and several, meaning
that many other creditworthy parties with substantial assets are potentially
responsible with respect to the individual sites. Based on our experience, we
estimate that our share of the total liability for the known Superfund sites
will be between $2 million and $10 million. At December 31, 2005, we have
recorded a liability for the minimum amount of our estimated Superfund
liability.

     In October 1998, during routine maintenance activities, we identified PCB
as a component in certain paint, grout, and sealant materials at Ludington. We
removed and replaced part of the PCB material. We have proposed a plan to deal
with the remaining materials and are awaiting a response from the EPA.

     MCV Environmental Issue: On July 12, 2004, the MDEQ, Air Control Division,
issued the MCV Partnership a Letter of Violation asserting that the MCV Facility
violated its Air Use Permit to Install (PTI) by exceeding the carbon monoxide
emission limit on the Unit 14 duct burner and failing to maintain certain
records in the required format. The MCV Partnership has declared five of the six
duct burners in the MCV Facility as unavailable for operational use (which
reduces the generation capability of the MCV Facility by approximately 100 MW)
and took other corrective action to address the MDEQ's assertions. The one
available duct burner was tested in April 2005 and its emissions met permitted
levels due to the configuration of that particular unit. The MCV Partnership
disagrees with certain of the MDEQ's assertions. The MCV Partnership filed a
response in July 2004 to address the Letter of Violation. On December 13, 2004,
the MDEQ informed the MCV Partnership

                                      CE-48
<PAGE>
                            CONSUMERS ENERGY COMPANY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

that it was pursuing an escalated enforcement action against the MCV Partnership
regarding the alleged violations of the MCV Facility's PTI. The MDEQ also stated
that the alleged violations are deemed federally significant and, as such,
placed the MCV Partnership on the EPA's High Priority Violators List (HPVL). The
MDEQ and the MCV Partnership are pursuing voluntary settlement of this matter,
which will satisfy state and federal requirements and remove the MCV Partnership
from the HPVL. Any such settlement may involve a fine, but at this time, the
MDEQ has not stated what, if any, fine they will seek to impose. At this time,
the MCV Partnership management cannot predict the financial impact or outcome of
this issue.

     On July 13, 2004, the MDEQ, Water Division, issued the MCV Facility a
Notice Letter asserting the MCV Facility violated its National Pollutant
Discharge Elimination System (NPDES) Permit by discharging heated process
wastewater into the storm water system, failing to document inspections, and
other minor infractions (alleged NPDES violations). In August 2004, the MCV
Partnership filed a response to the MDEQ letter covering the remediation for
each of the MDEQ's alleged violations. On October 17, 2005, the MDEQ, Water
Bureau, issued the MCV Partnership a Compliance Inspection report, which listed
several minor violations and concerns that needed to be addressed by the MCV
Facility. This report was issued in connection with an inspection of the MCV
Facility in September 2005, which was conducted for compliance and review of the
Storm Water Pollution Prevention Plans (SWPPP). The MCV Partnership submitted
its updated SWPPP on December 1, 2005. The MCV Partnership management believes
it has resolved all issues associated with the Notice Letter and Compliance
Inspection and does not expect any further MDEQ actions on these matters.

     ALLOCATION OF BILLING COSTS: In February 2006, the MPSC issued an order,
which determined that we violated the MPSC code of conduct by including a bill
insert advertising an unregulated service. The MPSC issued a penalty of $45,000
and stated that any subsidy for the use of our billing system arising from past
code of conduct violations will be accounted for in our next electric rate case.
We cannot predict the outcome or the impact on any future electric rate case.

     LITIGATION: In October 2003, a group of eight PURPA qualifying facilities
(the plaintiffs), which sell power to us, filed a lawsuit in Ingham County
Circuit Court. The lawsuit alleged that we incorrectly calculated the energy
charge payments made pursuant to power purchase agreements with qualifying
facilities. In February 2004, the Ingham County Circuit Court judge deferred to
the primary jurisdiction of the MPSC, dismissing the circuit court case without
prejudice. In February 2005, the MPSC issued an order in the 2004 PSCR plan case
concluding that we have been correctly administering the energy charge
calculation methodology. The plaintiffs have appealed the MPSC order to the
Michigan Court of Appeals. The plaintiffs also filed suit in the United States
Court for the Western District of Michigan, which the judge subsequently
dismissed. The plaintiffs have appealed the dismissal to the United States Court
of Appeals. We cannot predict the outcome of these appeals.

ELECTRIC RESTRUCTURING MATTERS

     ELECTRIC ROA: The Customer Choice Act allows all of our electric customers
to buy electric generation service from us or from an alternative electric
supplier. At December 31, 2005, alternative electric suppliers were providing
552 MW of generation service to ROA customers. This amount represents a decrease
of 40 percent compared to December 31, 2004, and is 7 percent of our total
distribution load. It is difficult to predict future ROA customer trends.

     STRANDED COSTS: Prior MPSC orders adopted a mechanism pursuant to the
Customer Choice Act to provide recovery of Stranded Costs that occur when
customers leave our system to purchase electricity from alternative suppliers.
In November 2005, we filed an application with the MPSC related to the
determination of 2004 Stranded Costs. Applying the Stranded Cost methodology
used in prior MPSC orders, we concluded that we experienced zero Stranded Costs
in 2004.

                                      CE-49
<PAGE>
                            CONSUMERS ENERGY COMPANY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

ELECTRIC RATE MATTERS

     POWER SUPPLY COSTS: To reduce the risk of high electric prices during peak
demand periods and to achieve our reserve margin target, we employ a strategy of
purchasing electric capacity and energy contracts for the physical delivery of
electricity primarily in the summer months and to a lesser degree in the winter
months. We have purchased capacity and energy contracts covering partially the
estimated reserve margin requirements for 2006 through 2010. As a result, we
have recognized an asset of $6 million for unexpired capacity and energy
contracts at December 31, 2005. The total premium costs of electric capacity and
energy contracts for 2005 were approximately $8 million.

     PSCR: The PSCR process allows recovery of reasonable and prudent power
supply costs. Revenues from the PSCR charges are subject to reconciliation after
actual costs are reviewed for reasonableness and prudence. In March 2005, we
submitted our 2004 PSCR reconciliation filing to the MPSC.

     In September 2005, we submitted our 2006 PSCR plan filing to the MPSC. In
November 2005, we submitted an amended 2006 PSCR plan to the MPSC to include
higher estimates for certain transmission and coal supply costs. In December
2005, the MPSC issued an order that temporarily excludes a portion of the
increased costs from our PSCR charge. The order also includes a one mill per kWh
reduction in the PSCR charge. We implemented this PSCR charge in January 2006.
If the temporary order remains in effect for the remainder of 2006, it would
result in a delay in the recovery of $87 million related to these excluded power
supply costs. We expect to recover fully these costs through the PSCR process.
To the extent that we incur and are unable to collect these costs in a timely
manner, our cash flows from electric utility operations will be affected
negatively. We are seeking full recovery of filed 2006 costs in 2006 as part of
this proceeding. We cannot predict the outcome of these PSCR proceedings.

OTHER ELECTRIC CONTINGENCIES

     THE MIDLAND COGENERATION VENTURE: The MCV Partnership, which leases and
operates the MCV Facility, contracted to sell electricity to Consumers for a
35-year period beginning in 1990. We hold a 49 percent partnership interest in
the MCV Partnership, and a 35 percent lessor interest in the MCV Facility. In
2004, we consolidated the MCV Partnership and the FMLP into our consolidated
financial statements in accordance with Revised FASB Interpretation No. 46. For
additional details, see Note 14, Consolidation of Variable Interest Entities.

     Under the MCV PPA, variable energy payments to the MCV Partnership are
based on the cost of coal burned at our coal plants and our operation and
maintenance expenses. However, the MCV Partnership's costs of producing
electricity are tied to the cost of natural gas. Natural gas prices have
increased substantially in recent years and throughout 2005. In 2005, the MCV
Partnership reevaluated the economics of operating the MCV Facility and recorded
an impairment charge. If natural gas prices remain at present levels or
increase, the operations of the MCV Facility would be adversely affected and
could result in the MCV Partnership failing to meet its obligations under the
sale and leaseback transactions and other contracts. For additional details on
the impairment of the MCV Facility, see Note 2, Asset Impairment Charges. We are
evaluating various alternatives in order to develop a new long-term strategy
with respect to the MCV Facility.

     Further, the cost that we incur under the MCV PPA exceeds the recovery
amount allowed by the MPSC. Underrecoveries of capacity and fixed energy
payments totaled $59 million in 2005, and were expensed directly to income. We
estimate underrecoveries of $55 million in 2006 and $39 million in 2007.
However, Consumers' direct savings from the RCP, after allocating a portion to
customers, are used to offset our capacity and fixed energy underrecoveries
expense. After September 15, 2007, we expect to claim relief under the
regulatory out provision in the MCV PPA, thereby limiting our capacity and fixed
energy payments to the MCV Partnership to the amounts that we collect from our
customers. The MCV Partnership has indicated that it may take issue with our
exercise of the regulatory out clause after September 15, 2007. We believe that
the clause is valid and fully

                                      CE-50
<PAGE>
                            CONSUMERS ENERGY COMPANY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

effective, but cannot assure that it will prevail in the event of a dispute. If
we are successful in exercising the regulatory out clause, the MCV Partnership
may have the right to terminate the MCV PPA. The MPSC's future actions on the
capacity and fixed energy payments recoverable from customers subsequent to
September 15, 2007 may affect negatively the financial performance of the MCV
Partnership.

     In January 2005, the MPSC issued an order approving the RCP, with
modifications. The RCP allows us to recover the same amount of capacity and
fixed energy charges from customers as approved in prior MPSC orders. However,
we are able to dispatch the MCV Facility on the basis of natural gas market
prices, which reduces the MCV Facility's annual production of electricity and,
as a result, reduces the MCV Facility's consumption of natural gas by an
estimated 30 to 40 bcf annually. This decrease in the quantity of high-priced
natural gas consumed by the MCV Facility will benefit our ownership interest in
the MCV Partnership.

     The MCV Facility fuel cost savings are first used to offset fully the cost
of replacement power. Second, $5 million annually, funded jointly by Consumers
and the MCV Partnership, is contributed to our RRP. Remaining savings are split
between the MCV Partnership and Consumers. Consumers shared 50 percent of its
direct savings in 2005, and will share 70 percent of its direct savings in 2006
and beyond. Since the MPSC has excluded these underrecoveries from the rate
making process, we anticipate that our savings from the RCP will not affect our
return on equity used in our base rate filings.

     In January 2005, we implemented the RCP. The underlying agreement for the
RCP between Consumers and the MCV Partnership extends through the term of the
MCV PPA. However, either party may terminate that agreement under certain
conditions. In February 2005, a group of intervenors in the RCP case filed for
rehearing of the MPSC order approving the RCP. The Attorney General also filed
an appeal with the Michigan Court of Appeals. We cannot predict the outcome of
these matters.

     MCV PARTNERSHIP PROPERTY TAXES: In January 2004, the Michigan Tax Tribunal
issued its decision in the MCV Partnership's tax appeal against the City of
Midland for tax years 1997 through 2000. The City of Midland appealed the
decision to the Michigan Court of Appeals, and the MCV Partnership filed a
cross-appeal at the Michigan Court of Appeals. The MCV Partnership also has a
pending case with the Michigan Tax Tribunal for tax years 2001 through 2005. The
MCV Partnership estimates that the 1997 through 2005 tax year cases will result
in a refund to the MCV Partnership of approximately $83 million, inclusive of
interest, if the decision of the Michigan Tax Tribunal is upheld. In February
2006, the Michigan Court of Appeals primarily affirmed the Michigan Tax Tribunal
decision, but remanded the case back to the Michigan Tax Tribunal to clarify
certain aspects of the Tax Tribunal decision. The remanded proceedings may
result in the determination of a greater refund to the MCV Partnership. The MCV
Partnership cannot predict the outcome of these proceedings; therefore, this
anticipated refund has not been recognized in earnings.

     NUCLEAR PLANT DECOMMISSIONING: Decommissioning funding practices approved
by the MPSC require us to file a report on the adequacy of funds for
decommissioning at three-year intervals. We prepared and filed updated cost
estimates for Big Rock and Palisades on March 31, 2004. Excluding additional
costs for spent nuclear fuel storage, due to the DOE's failure to accept this
spent nuclear fuel on schedule, these reports show a decommissioning cost of
$361 million for Big Rock and $868 million for Palisades. Since Big Rock is
currently in the process of decommissioning, this estimated cost includes
historical expenditures in nominal dollars and future costs in 2003 dollars,
with all Palisades costs given in 2003 dollars. Recently updated cost
projections for Big Rock indicate an anticipated decommissioning cost of $395
million as of the end of 2005.

     Big Rock: In December 2000, funding of the Big Rock trust fund stopped
because the MPSC-authorized decommissioning surcharge collection period expired.
Excluding the additional nuclear fuel storage costs due to the DOE's failure to
accept spent fuel on schedule, we are currently projecting that the level of
funds provided by the trust for Big Rock will fall short of the amount needed to
complete the decommissioning by $57 million. At this time, we plan to provide
the additional amounts needed from our corporate funds and, subsequent to the
completion in 2007 of radiological decommissioning work, seek recovery of such
expenditures from some

                                      CE-51
<PAGE>
                            CONSUMERS ENERGY COMPANY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

alternative source. We cannot assume that such efforts will be successful. The
following table shows our Big Rock decommissioning activities:

<Table>
<Caption>
                                                                  YEAR-TO-DATE        CUMULATIVE
                                                                DECEMBER 31, 2005    TOTAL-TO-DATE
                                                                -----------------    -------------
                                                                          (IN MILLIONS)
<S>                                                             <C>                  <C>
Decommissioning expenditures(a).............................           $47               $345
Withdrawals from trust funds................................            39                318
</Table>

-------------------------

(a)  Includes site restoration expenditures.

     These activities had no material impact on net income. At December 31,
2005, we have an investment in nuclear decommissioning trust funds of $10
million for Big Rock. In addition, at December 31, 2005, we have charged $9
million to our FERC jurisdictional depreciation reserve for the decommissioning
of Big Rock.

     Palisades: Excluding additional nuclear fuel storage costs due to the DOE's
failure to accept spent fuel on schedule, we concluded, based on the costs
estimates filed in March 2004, that the existing surcharge for Palisades needed
to be increased to $25 million annually, beginning January 1, 2006, and
continuing through 2011, our current license expiration date. In June 2004, we
filed an application with the MPSC seeking approval to increase the surcharge
for recovery of decommissioning costs related to Palisades beginning in 2006. In
January 2005, we filed a settlement agreement with the MPSC that was agreed to
by four of the six parties involved in the proceeding. The settlement agreement
provides for the continuation of the existing $6 million annual decommissioning
surcharge through 2011 and for the next periodic review to be filed in March
2007. In September 2005, the MPSC approved the contested settlement. Amounts
collected from electric retail customers and deposited in trusts, including
trust earnings, are credited to a regulatory liability.

     At December 31, 2005, we have an investment in the MPSC nuclear
decommissioning trust funds of $534 million for Palisades. In addition, at
December 31, 2005, we have a FERC decommissioning trust fund with a balance of
$11 million. For additional details on decommissioning costs accounted for as
asset retirement obligations, see Note 7, Asset Retirement Obligations.

     In March 2005, the NMC, which operates the Palisades plant, applied for a
20-year license renewal for the plant on behalf of Consumers. Certain parties
are seeking to intervene and have requested a hearing on the application. The
NRC has stated that it expects to take 22-30 months to review a license renewal
application. We expect a decision from the NRC in 2007. At this time, we cannot
determine what impact this will have on decommissioning costs or the adequacy of
funding.

     In December 2005, we announced plans to sell Palisades and have begun
pursuing this asset divestiture. As a sale is not probable to occur until a firm
purchase commitment is entered into with a potential buyer, we have not
classified the Palisades assets as held for sale on our Consolidated Balance
Sheets.

     NUCLEAR MATTERS:

     DOE Litigation: In 1997, a U.S. Court of Appeals decision confirmed that
the DOE was to begin accepting deliveries of spent nuclear fuel for disposal by
January 1998. Subsequent U.S. Court of Appeals litigation, in which we and other
utilities participated, has not been successful in producing more specific
relief for the DOE's failure to accept the spent nuclear fuel.

     There are two court decisions that support the right of utilities to pursue
damage claims in the United States Court of Claims against the DOE for failure
to take delivery of spent nuclear fuel. Over 60 utilities have initiated
litigation in the United States Court of Claims. We filed our complaint in
December 2002. On April 29, 2005, the court ruled on various motions for summary
judgment filed by the DOE and us. The court denied the DOE's motions to dismiss
portions of the complaint including its motion seeking recovery of a one-time
fee payable by us prior to delivery of the spent nuclear fuel. The court granted
the DOE's motion to recoup this fee against any

                                      CE-52
<PAGE>
                            CONSUMERS ENERGY COMPANY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

damages awarded to us. The court granted our motion for summary judgment on
liability. If our litigation against the DOE is successful, we plan to use any
recoveries to pay the cost of spent nuclear fuel storage until the DOE takes
possession as required by law. We can make no assurance that the litigation
against the DOE will be successful.

     In July 2002, Congress approved and the President signed a bill designating
the site at Yucca Mountain, Nevada, for the development of a repository for the
disposal of high-level radioactive waste and spent nuclear fuel. We expect that
the DOE, in due course, will submit a final license application to the NRC for
the repository. The application and review process is estimated to take several
years.

     Insurance: We maintain nuclear insurance coverage on our nuclear plants. At
Palisades, we maintain nuclear property insurance from NEIL totaling $2.750
billion and insurance that would partially cover the cost of replacement power
during certain prolonged accidental outages. Because NEIL is a mutual insurance
company, we could be subject to assessments of up to $28 million in any policy
year if insured losses in excess of NEIL's maximum policyholders surplus occur
at our, or any other member's, nuclear facility. NEIL's policies include
coverage for acts of terrorism.

     At Palisades, we maintain nuclear liability insurance for third-party
bodily injury and off-site property damage resulting from a nuclear energy
hazard for up to approximately $10.761 billion, the maximum insurance liability
limits established by the Price-Anderson Act. The United States Congress enacted
the Price-Anderson Act to provide financial liability protection for those
parties who may be liable for a nuclear accident or incident. Part of the
Price-Anderson Act's financial protection is a mandatory industry-wide program
under which owners of nuclear generating facilities could be assessed if a
nuclear incident occurs at any nuclear generating facility. The maximum
assessment against us could be $101 million per occurrence, limited to maximum
annual installment payments of $15 million.

     We also maintain insurance under a program that covers tort claims for
bodily injury to nuclear workers caused by nuclear hazards. The policy contains
a $300 million nuclear industry aggregate limit. Under a previous insurance
program providing coverage for claims brought by nuclear workers, we remain
responsible for a maximum assessment of up to $6 million. This requirement will
end December 31, 2007.

     Big Rock remains insured for nuclear liability by a combination of
insurance and a NRC indemnity totaling $544 million, and a nuclear property
insurance policy from NEIL.

     Insurance policy terms, limits, and conditions are subject to change during
the year as we renew our policies.

GAS CONTINGENCIES

     GAS ENVIRONMENTAL MATTERS: We expect to incur investigation and remediation
costs at a number of sites under the Michigan Natural Resources and
Environmental Protection Act, a Michigan statute that covers environmental
activities including remediation. These sites include 23 former manufactured gas
plant facilities. We operated the facilities on these sites for some part of
their operating lives. For some of these sites, we have no current ownership or
may own only a portion of the original site. In 2005, we estimated our remaining
costs to be between $29 million and $71 million, based on 2005 discounted costs,
using a discount rate of three percent. The discount rate represents a 10-year
average of U.S. Treasury bond rates reduced for increases in the consumer price
index. We expect to fund most of these costs through insurance proceeds and
MPSC-approved rates. At December 31, 2005, we have a liability of $29 million,
net of $53 million of expenditures incurred to date, and a regulatory asset of
$62 million. Any significant change in assumptions, such as an increase in the
number of sites, different remediation techniques, nature and extent of
contamination, and legal and regulatory requirements, could affect our estimate
of remedial action costs.

     GAS TITLE TRACKING FEES AND SERVICES: On February 14, 2005, the FERC issued
its latest order involving Consumers' Gas Title Transfer Tracking Fees and
Services. In doing so, the FERC agreed with us that such

                                      CE-53
<PAGE>
                            CONSUMERS ENERGY COMPANY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

orders only apply to a title transfer tracking fee charged and collected in
connection with Consumers' FERC blanket transportation service. Because of the
newly stated limits on what fees are subject to refund, we believe that if any
such refunds are ultimately required, they will not be material.

GAS RATE MATTERS

     GAS COST RECOVERY: The GCR process is designed to allow us to recover all
of our purchased natural gas costs if incurred under reasonable and prudent
policies and practices. The MPSC reviews these costs for prudency in an annual
reconciliation proceeding.

     We have one GCR reconciliation filing pending with the MPSC for the
2004-2005 GCR year. It was filed in June 2005. We have calculated a $2 million
net overrecovery for the GCR year, including interest through March 2005 and
refunds that we received from our suppliers that are required to be refunded to
our customers. The case schedule has been suspended to allow for settlement
discussions.

     GCR plan for year 2005-2006: In December 2004, we filed an application with
the MPSC seeking approval of a GCR plan for the 12-month period of April 2005
through March 2006. Our request proposed using a GCR factor consisting of:

     - a base GCR factor of $6.98 per mcf, plus

     - a quarterly GCR ceiling price adjustment contingent upon future events.

     The GCR factor can be adjusted monthly, provided it remains at or below the
current ceiling price. The quarterly adjustment mechanism allows an increase in
the GCR ceiling price to reflect a portion of purchased natural gas cost
increases if the average NYMEX price for a specified period is greater than that
used in calculating the base GCR factor. Actual gas costs and revenues will be
subject to an annual reconciliation proceeding.

     In June 2005, four of the five parties filed a settlement agreement. The
fifth party filed a statement of non-objection. The settlement agreement
includes a GCR ceiling price adjustment contingent upon future events.

     In September 2005, we filed a motion with the MPSC seeking to reopen our
GCR plan for year 2005-2006. Since the settlement agreement entered into in June
2005, there have been unanticipated increases in the market price for natural
gas.

     In November 2005, the MPSC issued an Order related to our reopened GCR plan
for year 2005-2006. The order approved the June 2005 settlement agreement along
with a new GCR factor consisting of a fixed cap of $10.10 per mcf for the
December 2005 through March 2006 billing period. Our GCR factor for the billing
month of February 2006 is $8.20 per mcf. One of the intervenors in this case has
appealed the MPSC Order to the Michigan Court of Appeals. We are unable to
predict the outcome of this appeal.

     GCR plan for year 2006-2007: In December 2005, we filed an application with
the MPSC seeking approval of a GCR plan for the 12-month period of April 2006
through March 2007. Our request proposed using a GCR factor consisting of:

     - a base GCR factor of $11.10 per mcf, plus

     - a quarterly GCR ceiling price adjustment contingent upon future events.

                                      CE-54
<PAGE>
                            CONSUMERS ENERGY COMPANY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     2001 GAS DEPRECIATION CASE: In October and December 2004, the MPSC issued
Opinions and Orders in our gas depreciation case, which:

     - reaffirmed the previously ordered $34 million reduction in our
       depreciation expense,

     - required us to undertake a study to determine why our plant removal costs
       are in excess of other regulated Michigan natural gas utilities, and

     - required us to file a study report with the MPSC Staff on or before
       December 31, 2005.

     We filed the study report with the MPSC Staff on December 29, 2005.

     We are also required to file our next gas depreciation case within 90 days
after the MPSC issuance of a final order in the pending case related to ARO
accounting. We expect an MPSC order in the first quarter of 2006.

     If the depreciation case order is issued after the gas general rate case
order, we proposed to incorporate its results into the gas general rates using a
surcharge mechanism.

     2005 GAS RATE CASE: In July 2005, we filed an application with the MPSC
seeking a 12 percent authorized return on equity along with a $132 million
annual increase in our gas delivery and transportation rates. The primary
reasons for the request are recovery of new investments, carrying costs on
natural gas inventory related to higher gas prices, system maintenance, employee
benefits, and low-income assistance. If approved, the request would add
approximately 5 percent to the typical residential customer's average monthly
bill. The increase would also affect commercial and industrial customers.

     As part of this filing, we also requested interim rate relief of $75
million. The MPSC Staff and intervenors filed interim rate relief testimony on
October 31, 2005. In its testimony, the MPSC Staff recommended granting interim
rate relief of $38 million. As of February 2006, the MPSC has not acted on our
interim rate relief request.

     On February 13, 2006, the MPSC Staff recommended granting final rate relief
of $62 million. The MPSC Staff proposed that $17 million of this amount be
contributed to a low income energy efficiency fund. The MPSC Staff also
recommended reducing our return on common equity to 11.15 percent, from our
current 11.4 percent.

OTHER CONTINGENCIES

     IRS RULING: In August 2005, the IRS issued Revenue Ruling 2005-53 and
regulations to provide guidance with respect to the use of the "simplified
service cost" method of tax accounting. We use this tax accounting method,
generally allowed by the IRS under section 263A of the Internal Revenue Code,
with respect to the allocation of certain corporate overheads to the tax basis
of self-constructed utility assets. Under the IRS guidance, significant issues
with respect to the application of this method remain unresolved and subject to
dispute. However, the effect of the IRS's position may be to require Consumers
either (1) to repay a portion of previously received tax benefits, or (2) to add
back to taxable income, half in each of 2005 and 2006, a significant portion of
previously deducted overheads. The impact of this matter on future earnings,
cash flows, or our present NOL carryforwards remains uncertain, but could be
material. We have recorded an increase in our taxable income of $359 million in
2005, and a corresponding reduction in deferred taxes related to property, to
reflect the estimated 2005 effect of the new regulation. For additional
information, see Note 8, Income Taxes. Consumers cannot predict the outcome of
this matter.

     In addition to the matters disclosed within this Note, we are party to
certain lawsuits and administrative proceedings before various courts and
governmental agencies arising from the ordinary course of business. These
lawsuits and proceedings may involve personal injury, property damage,
contractual matters, environmental issues, federal and state taxes, rates,
licensing, and other matters.

                                      CE-55
<PAGE>
                            CONSUMERS ENERGY COMPANY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     We have accrued estimated losses for certain contingencies discussed within
this Note. Resolution of these contingencies is not expected to have a material
adverse impact on our financial position, liquidity, or results of operations.

     FASB INTERPRETATION NO. 45, GUARANTOR'S ACCOUNTING AND DISCLOSURE
REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF
OTHERS: The Interpretation requires the guarantor, upon issuance of a guarantee,
to recognize a liability for the fair value of the obligation it undertakes in
issuing the guarantee. The initial recognition and measurement provision of this
Interpretation does not apply to some guarantee contracts, such as product
warranties, derivatives, or guarantees between corporations under common
control, although disclosure of these guarantees is required.

     The following table describes our guarantees at December 31, 2005:

<Table>
<Caption>
                                                                                  MAXIMUM
GUARANTEE DESCRIPTION                           ISSUE DATE    EXPIRATION DATE    OBLIGATION    CARRYING AMOUNT
---------------------                           ----------    ---------------    ----------    ---------------
                                                                                                (IN MILLIONS)
<S>                                             <C>           <C>                <C>           <C>
Standby letters of credit...................     Various          Various           $ 36            $  --
Surety bonds................................     Various        Indefinite             2               --
Performance guarantee.......................     Jan 1987        Mar 2015             85               --
Nuclear insurance retrospective premiums....     Various        Indefinite           135               --
</Table>

     The following table provides additional information regarding our
guarantees:

<Table>
<Caption>
GUARANTEE DESCRIPTION            HOW GUARANTEE AROSE              EVENTS THAT WOULD REQUIRE PERFORMANCE
---------------------            -------------------              -------------------------------------
<S>                              <C>                              <C>
Standby letters of credit        Normal operations of coal        Noncompliance with environmental
                                 power plants                     regulations and inadequate response
                                                                  to demands for corrective action
                                 Natural gas transportation       Nonperformance
                                 Self-insurance requirement       Nonperformance
Surety bonds                     Normal operating activity,       Nonperformance
                                 permits and licenses
Performance guarantee            Agreement to provide power       Termination of the Steam and Electric
                                 and steam to Dow                 Power Agreement by Dow due to the MCV
                                                                  Partnership's nonperformance
Nuclear insurance                Normal operations of nuclear     Call by NEIL and Price-Anderson Act
  retrospective premiums         plants                           for nuclear incident
</Table>

     At December 31, 2005, none of our guarantees contained provisions allowing
us to recover, from third parties, any amount paid under the guarantees. In the
ordinary course of business, we enter into agreements containing
indemnifications in connection with a variety of transactions including
financing agreements. While we cannot estimate our maximum exposure under these
indemnities, we consider the probability of liability remote.

                                      CE-56
<PAGE>
                            CONSUMERS ENERGY COMPANY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

4: FINANCINGS AND CAPITALIZATION

Long-term debt at December 31 follows:

<Table>
<Caption>
                                                      INTEREST RATE (%)    MATURITY      2005      2004
                                                      -----------------    ---------    ------    ------
                                                                                         (IN MILLIONS)
<S>                                                   <C>                  <C>          <C>       <C>
  First mortgage bonds............................           4.250           2008       $  250    $  250
                                                             4.800           2009          200       200
                                                             4.400           2009          150       150
                                                             4.000           2010          250       250
                                                             5.000           2012          300       300
                                                             5.375           2013          375       375
                                                             6.000           2014          200       200
                                                             5.000           2015          225       225
                                                             5.500           2016          350       350
                                                             5.150           2017          250        --
                                                             5.650           2020          300        --
                                                             5.650           2035          150        --
                                                             5.800           2035          175        --
                                                                                        ------    ------
                                                                                         3,175     2,300
                                                                                        ------    ------
  Senior notes....................................           6.250                          --       332
                                                             6.375           2008          159       159
                                                             6.875           2018          180       180
                                                             6.500                          --       141
                                                                                        ------    ------
                                                                                           339       812
                                                                                        ------    ------
  Securitization bonds............................           5.295(a)      2006-2015       369       398
                                                                                        ------    ------
  FMLP Debt(b):
     Subordinated secured notes...................          11.750                          --        70
     Subordinated secured notes...................          13.250           2006           56        75
     Tax-exempt subordinated secured notes........           6.875           2009          137       137
     Tax-exempt subordinated secured notes........           6.750           2009           14        14
                                                                                        ------    ------
                                                                                           207       296
                                                                                        ------    ------
  Nuclear fuel disposal liability.................                            (c)          145       141
  Tax-exempt pollution control revenue bonds......         Various         2010-2035       161       126
  Long-term bank debt and other...................        Variable                          --        61
                                                                                        ------    ------
                                                                                           306       328
                                                                                        ------    ------
Total principal amounts outstanding...............                                       4,396     4,134
  Current amounts.................................                                         (85)     (118)
  Net unamortized discount........................                                          (8)      (16)
                                                                                        ------    ------
Total Long-term debt..............................                                      $4,303    $4,000
                                                                                        ======    ======
</Table>

-------------------------
(a)  Represents the weighted average interest rate at December 31, 2005 (5.188
     percent at December 31, 2004).

(b)  We consolidate the FMLP in accordance with Revised FASB Interpretation No.
     46. The FMLP debt is secured by certain assets of the MCV Partnership and
     the FMLP. The debt is non-recourse to other assets of Consumers.

(c)  Maturity date uncertain.

                                      CE-57
<PAGE>
                            CONSUMERS ENERGY COMPANY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     FINANCINGS:  The following is a summary of significant long-term debt
issuances and retirements during 2005:

<Table>
<Caption>
                                                             INTEREST    ISSUE/RETIREMENT
                                              PRINCIPAL      RATE (%)          DATE          MATURITY DATE
                                              ---------      --------    ----------------    -------------
                                            (IN MILLIONS)
<S>                                         <C>              <C>         <C>                 <C>
DEBT ISSUANCES
  FMB...................................        $250             5.15     January 2005       February 2017
  FMB...................................         300             5.65      March 2005          April 2020
  FMB insured quarterly notes...........         150             5.65      April 2005          April 2035
  LORB..................................          35         Variable      April 2005          April 2035
  FMB...................................         175             5.80      August 2005       September 2035
                                            -------------
     Total..............................        $910
                                            =============
DEBT RETIREMENTS
  Long-term bank debt...................        $ 60         Variable     January 2005       November 2006
  Long-term debt -- related parties.....         180             9.25     January 2005       December 2029
  Long-term debt -- related parties.....          73             8.36     February 2005      December 2015
  Long-term debt -- related parties.....         124             8.20     February 2005      September 2027
  Senior notes..........................         332             6.25     April and May      September 2006
                                                                              2005
  Senior insured quarterly notes........         141             6.50       May 2005          October 2028
  FMLP debt.............................          89          Various       July 2005          July 2005
                                            -------------
     Total..............................        $999
                                            =============
</Table>

     Costs associated with 2005 debt issuances totaled $13 million and are being
amortized over the lives of the related debt. Call premiums associated with the
2005 debt retirements totaled $10 million and are being amortized over the lives
of the newly issued debt.

     FIRST MORTGAGE BONDS: We secure our FMB by a mortgage and lien on
substantially all of our property. Our ability to issue and sell securities is
restricted by certain provisions in the first mortgage bond indenture, our
articles of incorporation, and the need for regulatory approvals under federal
law. See "FMB Indenture Limitations" section within this Note.

     SECURITIZATION BONDS: Certain regulatory assets collateralize
Securitization bonds. We are not the owners of these regulatory assets. The
bondholders have no recourse to our other assets. Through our rate structure, we
bill customers for securitization surcharges to fund the payment of principal,
interest, and other related expenses on the Securitization bonds. Securitization
surcharges collected are remitted to a trustee for the Securitization bonds and
are not available to our creditors. Securitization surcharges totaled $50
million annually in 2005 and 2004.

     LONG-TERM DEBT -- RELATED PARTIES: We formed various statutory wholly-owned
business trusts for the sole purpose of issuing preferred securities and lending
the gross proceeds to ourselves. The sole assets of the trusts consist of the
debentures described in the following table. These debentures have terms similar
to those of the mandatorily redeemable preferred securities the trusts issued.
We determined that we do not hold the controlling financial interest in our
trust preferred security structures. Accordingly, those entities are reflected
in Long-term debt -- related parties.

                                      CE-58
<PAGE>
                            CONSUMERS ENERGY COMPANY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     The following is a summary of Long-term debt -- related parties at December
31:

<Table>
<Caption>
                                                              INTEREST
DEBENTURE AND RELATED PARTY                                   RATE (%)         MATURITY    2005     2004
---------------------------                                   --------         --------    ----     ----
                                                                                           (IN MILLIONS)
<S>                                                       <C>                  <C>         <C>      <C>
Subordinated deferrable interest notes:
  Consumers Power Company Financing I.................          8.36                       $  --    $  73
  Consumers Energy Company Financing II...............          8.20                          --      124
Subordinated debentures:
  Consumers Energy Company Financing III..............          9.25                          --      180
  Consumers Energy Company Financing IV(a)............          9.00             2031        129      129
                                                                                           -----    -----
Total principal amounts outstanding...................                                       129      506
  Current amounts.....................................                                      (129)    (180)
                                                                                           -----    -----
Total Long-term debt -- related parties...............                                     $  --    $ 326
                                                                                           =====    =====
</Table>

-------------------------
(a)  Extinguished in February 2006.

     In the event of default, holders of the Trust Preferred Securities would be
entitled to exercise and enforce the trusts' creditor rights against us, which
may include acceleration of the principal amount due on the debentures. We have
issued certain guarantees with respect to payments on the preferred securities.
These guarantees, when taken together with our obligations under the debentures,
related indenture and trust documents, provide full and unconditional guarantees
for the trusts' obligations under the preferred securities.

     DEBT MATURITIES: At December 31, 2005, the aggregate annual maturities for
long-term debt and long-term debt -- related parties for the next five years
are:

<Table>
<Caption>
                                                                            PAYMENTS DUE
                                                                ------------------------------------
                                                                2006    2007    2008    2009    2010
                                                                ----    ----    ----    ----    ----
                                                                           (IN MILLIONS)
<S>                                                             <C>     <C>     <C>     <C>     <C>
Long-term debt and long-term debt -- related parties........    $214    $59     $504    $443    $343
</Table>

     REGULATORY AUTHORIZATION FOR FINANCINGS: In April 2005, the FERC issued an
authorization to permit us to issue up to an additional $1.0 billion ($2.0
billion in total) of long-term securities for refinancing or refunding purposes,
and up to an additional $1.0 billion ($2.5 billion in total) of long-term
securities for general corporate purposes during the period ending June 30,
2006.

     Combined with remaining availability from previously issued FERC
authorizations, we can now issue up to:

     - $876 million of long-term securities for refinancing or refunding
       purposes,

     - $1.159 billion of long-term securities for general corporate purposes,
       and

     - $1.935 billion of long-term FMB to be issued solely as collateral for
       other long-term securities.

     FMB INDENTURE LIMITATIONS: Irrespective of our existing FERC authorization,
our ability to issue FMB as primary obligations or as collateral for financing
is governed by certain provisions of our indenture dated September 1, 1945 and
its subsequent supplements. Due to the adverse impact of the MCV Partnership
asset impairment charge recorded in September 2005 on the net earnings coverage
test in one of the governing bond-issuance provisions of the indenture, we
expect our ability to issue additional FMB will be limited to $298 million
through September 30, 2006. After September 30, 2006, our ability to issue FMB
in excess of $298 million will be based on achieving a two-times FMB interest
coverage ratio.

                                      CE-59
<PAGE>
                            CONSUMERS ENERGY COMPANY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     REVOLVING CREDIT FACILITIES: The following secured revolving credit
facilities with banks are available at December 31, 2005:

<Table>
<Caption>
                                                                                     OUTSTANDING
                                                            AMOUNT OF     AMOUNT     LETTERS-OF-     AMOUNT
COMPANY                                  EXPIRATION DATE    FACILITY     BORROWED      CREDIT       AVAILABLE
-------                                  ---------------    ---------    --------    -----------    ---------
                                                                              (IN MILLIONS)
<S>                                      <C>                <C>          <C>         <C>            <C>
Consumers............................       May 18, 2010      $500        $  --          $36          $464
MCV Partnership......................    August 26, 2006        50           --            2            48
</Table>

     DIVIDEND RESTRICTIONS: Under the provisions of our articles of
incorporation, at December 31, 2005, we had $179 million of unrestricted
retained earnings available to pay common stock dividends. Covenants in our debt
facilities cap common stock dividend payments at $300 million in a calendar
year. During 2005, we paid $277 million in common stock dividends to CMS Energy.

     SALE OF ACCOUNTS RECEIVABLE: Under a revolving accounts receivable sales
program, we currently sell certain accounts receivable to a wholly owned,
consolidated, bankruptcy remote special purpose entity. In turn, the special
purpose entity may sell an undivided interest in up to $325 million of the
receivables. The special purpose entity sold $325 million of receivables at
December 31, 2005 and $304 million of receivables at December 31, 2004. We
continue to service the receivables sold to the special purpose entity. The
purchaser of the receivables has no recourse against our other assets for
failure of a debtor to pay when due and no right to any receivables not sold. We
have neither recorded a gain or loss on the receivables sold nor retained
interest in the receivables sold.

     Certain cash flows under our accounts receivable sales program are shown in
the following table:

<Table>
<Caption>
YEARS ENDED DECEMBER 31                                          2005      2004
-----------------------                                          ----      ----
                                                                 (IN MILLIONS)
<S>                                                             <C>       <C>
Net cash flow as a result of accounts receivable
  financing.................................................    $   21    $    7
Collections from customers..................................    $4,859    $4,541
</Table>

     PREFERRED STOCK: Our Preferred Stock outstanding follows:

<Table>
<Caption>
                                                            OPTIONAL      NUMBER OF SHARES
                                                           REDEMPTION     ----------------
DECEMBER 31                                      SERIES      PRICE        2005       2004      2005     2004
-----------                                      ------    ----------     ----       ----      ----     ----
                                                                                               (IN MILLIONS)
<S>                                              <C>       <C>           <C>        <C>        <C>      <C>
Preferred Stock
  Cumulative $100 par value, Authorized
     7,500,000 shares, with no mandatory
     redemption..............................    $4.16      $103.25       68,451     68,451     $ 7      $ 7
                                                 $4.50      $110.00      373,148    373,148      37       37
                                                                                               -----    -----
Total Preferred Stock........................                                                   $44      $44
                                                                                               =====    =====
</Table>

5: FINANCIAL AND DERIVATIVE INSTRUMENTS

     FINANCIAL INSTRUMENTS: The carrying amounts of cash, short-term
investments, and current liabilities approximate their fair values because of
their short-term nature. We estimate the fair values of long-term financial
instruments based on quoted market prices or, in the absence of specific market
prices, on quoted market prices of similar instruments or other valuation
techniques.

                                      CE-60
<PAGE>
                            CONSUMERS ENERGY COMPANY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     The cost and fair value of our long-term financial instruments are as
follows:

<Table>
<Caption>
                                                       2005                                   2004
                                        -----------------------------------    -----------------------------------
                                                                UNREALIZED                             UNREALIZED
DECEMBER 31                              COST     FAIR VALUE    GAIN (LOSS)     COST     FAIR VALUE    GAIN (LOSS)
-----------                              ----     ----------    -----------     ----     ----------    -----------
                                                                      (IN MILLIONS)
<S>                                     <C>       <C>           <C>            <C>       <C>           <C>
Long-term debt(a)...................    $4,388      $4,393         $ (5)       $4,118      $4,232         $(114)
Long-term debt -- related
  parties(b)........................       129         131           (2)          506         518           (12)
Available-for-sale securities:
Common stock of CMS Energy(c).......        10          33           23            10          25            15
SERP:
  Equity securities.................        16          22            6            15          21             6
  Debt securities(e)................         8           8           --             9           9            --
Nuclear decommissioning
  investments(d):
  Equity securities.................       134         252          118           136         262           126
  Debt securities(e)................       287         291            4           291         302            11
</Table>

-------------------------
(a)  Includes current maturities of $85 million at December 31, 2005 and $118
     million at December 31, 2004. Settlement of long-term debt is generally not
     expected until maturity.

(b)  Includes current maturities of $129 million at December 31, 2005 and $180
     million at December 31, 2004.

(c)  At December 31, 2005, we held 2.3 million shares of CMS Energy Common
     Stock.

(d)  Nuclear decommissioning investments include cash and cash equivalents and
     accrued income totaling $12 million at December 31, 2005 and $11 million at
     December 31, 2004. Unrealized gains and losses on nuclear decommissioning
     investments are reflected as regulatory liabilities.

(e)  The fair value of available-for-sale debt securities by contractual
     maturity at December 31, 2005 is as follows:

<Table>
<Caption>
                                                                      (IN MILLIONS)
      <S>                                                             <C>
      Due in one year or less.....................................        $ 14
      Due after one year through five years.......................         100
      Due after five years through ten years......................          65
      Due after ten years.........................................         120
                                                                          ----
        Total.....................................................        $299
                                                                          ====
</Table>

     Our held-to-maturity investments consist of debt securities held by the MCV
Partnership totaling $91 million at December 31, 2005 and $139 million at
December 31, 2004. These securities represent funds restricted primarily for
future lease payments and are classified as Other assets on our Consolidated
Balance Sheets. These investments have original maturity dates of approximately
one year or less and, because of their short-term maturities, carrying amounts
approximate fair value.

     DERIVATIVE INSTRUMENTS: We are exposed to market risks including, but not
limited to, changes in commodity prices, interest rates, and equity security
prices. We may use various contracts to manage these risks, including options,
futures, swaps, and forward contracts. We enter into these risk management
contracts using established policies and procedures, under the direction of
both:

     - an executive oversight committee consisting of senior management
       representatives, and

     - a risk committee consisting of business unit managers.

     Our intention is that any increases or decreases in the value of these
contracts will be offset by an opposite change in the value of the item at risk.
We enter into all of these contracts for purposes other than trading.

                                      CE-61
<PAGE>
                            CONSUMERS ENERGY COMPANY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     The contracts we use to manage market risks may qualify as derivative
instruments that are subject to derivative and hedge accounting under SFAS No.
133. If a contract is a derivative, it is recorded on the balance sheet at its
fair value. We then adjust the resulting asset or liability each quarter to
reflect any change in the market value of the contract, a practice known as
marking the contract to market. If a derivative qualifies for cash flow hedge
accounting treatment, the changes in fair value (gains or losses) are reported
in accumulated other comprehensive income; otherwise, the changes are reported
in earnings.

     For a derivative instrument to qualify for hedge accounting:

     - the relationship between the derivative instrument and the item being
       hedged must be formally documented at inception,

     - the derivative instrument must be highly effective in offsetting the
       hedged item's cash flows or changes in fair value, and

     - if hedging a forecasted transaction, the forecasted transaction must be
       probable.

     If a derivative qualifies for cash flow hedge accounting treatment and
gains or losses are recorded in accumulated other comprehensive income, those
gains or losses will be reclassified into earnings in the same period or periods
the hedged forecasted transaction affects earnings. If a cash flow hedge is
terminated early because it is determined that the forecasted transaction will
not occur, any gain or loss recorded in accumulated other comprehensive income
at that date is recognized immediately in earnings. If a cash flow hedge is
terminated early for other economic reasons, any gain or loss as of the
termination date is deferred and then reclassified to earnings when the
forecasted transaction affects earnings. The ineffective portion, if any, of all
hedges is recognized in earnings.

     To determine the fair value of our derivatives, we use information from
external sources (i.e., quoted market prices and third-party valuations), if
available. For certain contracts, this information is not available and we must
use mathematical valuation models to value our derivatives. These models require
various inputs and assumptions, including commodity market prices and
volatilities, as well as interest rates and contract maturity dates. The cash
returns we actually realize on these contracts may vary, either positively or
negatively, from the results that we estimate using these models. As part of
valuing our derivatives at market, we maintain reserves, if necessary, for
credit risks arising from the financial condition of counterparties.

     The majority of our commodity purchase and sale contracts are not subject
to derivative accounting under SFAS No. 133 because:

     - they do not have a notional amount (that is, a number of units specified
       in a derivative instrument, such as MW of electricity or bcf of natural
       gas),

     - they qualify for the normal purchases and sales exception, or

     - there is not an active market for the commodity.

     Our coal purchase contracts are not derivatives because there is not an
active market for the coal we purchase. Similarly, our electric capacity and
energy contracts are not derivatives due to the lack of an active energy market
in Michigan. If active markets for these commodities develop in the future, some
of these contracts may qualify as derivatives. For our coal purchase contracts,
the resulting mark-to-market impact on earnings could be material. For our
electric capacity and energy contracts, we believe that we would be able to
apply the normal purchases and sales exception, and, therefore, would not be
required to mark these contracts to market.

     The MISO began operating the Midwest Energy Market on April 1, 2005. By
operating the Midwest Energy Market, the MISO centrally dispatches electricity
and transmission service throughout much of the Midwest and provides day-ahead
and real-time energy market information. At this time, we believe that the
establishment of this market does not represent the development of an active
energy market in Michigan, as defined by

                                      CE-62
<PAGE>
                            CONSUMERS ENERGY COMPANY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SFAS No. 133. However, as the Midwest Energy Market matures, we will continue to
monitor its activity level and evaluate if an active energy market may exist in
Michigan.

     Derivative accounting is required for certain contracts used to limit our
exposure to commodity price risk. The following table summarizes our derivative
instruments:

<Table>
<Caption>
                                                               2005                            2004
DECEMBER 31                                        ----------------------------    ----------------------------
-----------                                                FAIR     UNREALIZED             FAIR     UNREALIZED
DERIVATIVE INSTRUMENTS                             COST    VALUE    GAIN (LOSS)    COST    VALUE    GAIN (LOSS)
----------------------                             ----    -----    -----------    ----    -----    -----------
                                                                          (IN MILLIONS)
<S>                                                <C>     <C>      <C>            <C>     <C>      <C>
Gas supply option contracts....................    $ 1     $ (1)       $ (2)       $ 2      $--         $(2)
FTRs...........................................     --        1           1         --       --          --
Derivative contracts associated with the MCV
  Partnership:
  Long-term gas contracts......................     --      205         205         --       56          56
  Gas futures and swaps........................     --      223         223         --       64          64
</Table>

We record the fair value of our derivative contracts in Derivative instruments,
Other assets, or Other liabilities on our Consolidated Balance Sheets.

     GAS SUPPLY OPTION CONTRACTS: Our gas utility business uses fixed-priced
weather-based gas supply call options and fixed-priced gas supply call and put
options to meet our regulatory obligation to provide gas to our customers at a
reasonable and prudent cost. As part of the GCR process, the mark-to-market
gains and losses associated with these options are reported directly in earnings
as part of Other income, and then immediately reversed out of earnings and
recorded on the balance sheet as a regulatory asset or liability. At December
31, 2005, we had purchased fixed-priced weather-based gas supply call options
and had sold fixed-priced gas supply put options.

     FTRS: With the establishment of the Midwest Energy Market, FTRs were
established. FTRs are financial instruments that manage price risk related to
electricity transmission congestion. An FTR entitles its holder to receive
compensation (or, conversely, to remit payment) for congestion-related
transmission charges.

     DERIVATIVE CONTRACTS ASSOCIATED WITH THE MCV PARTNERSHIP: Long-term gas
contracts: The MCV Partnership uses long-term gas contracts to purchase, and
manage the cost of, the natural gas it needs to generate electricity and steam.
The MCV Partnership believes that certain of these contracts qualify as normal
purchases under SFAS No. 133. Accordingly, we have not recognized these
contracts at fair value on our Consolidated Balance Sheets at December 31, 2005.

     The MCV Partnership also holds certain long-term gas contracts that do not
qualify as normal purchases because these contracts contain volume optionality.
In addition, as a result of implementing the RCP in January 2005, a significant
portion of long-term gas contracts no longer qualify as normal purchases,
because the gas will not be used to generate electricity or steam. Accordingly,
all of these contracts are accounted for as derivatives, with changes in fair
value recorded in earnings each quarter. For the year ended December 31, 2005,
we recorded a $149 million gain, before considering tax effects and minority
interest, associated with the increase in fair value of these long-term gas
contracts. This gain is included in the total Fuel costs mark-to-market at MCV
on our Consolidated Statements of Income (Loss). As a result of mark-to-market
gains, we have recorded derivative assets totaling $205 million associated with
the fair value of long-term gas contracts on our Consolidated Balance Sheets.
Because of the volatility of the natural gas market, the MCV Partnership expects
future earnings volatility on these contracts, since gains and losses will be
recorded each quarter. We expect almost all of these derivative assets to
reverse through earnings during 2006 and 2007 as the gas is purchased, with the
remainder reversing between 2008 and 2011. Due to the impairment of the MCV
Facility, the equity held by the minority interest owners of the MCV Partnership
has decreased significantly. Since we have the controlling financial interest in
the

                                      CE-63
<PAGE>
                            CONSUMERS ENERGY COMPANY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MCV Partnership, we will assume 100 percent of future losses recognized from the
reversal of these assets, not just our proportionate share.

     For further details on the RCP, see Note 3, Contingencies, "Other Electric
Contingencies -- The Midland Cogeneration Venture."

     Gas Futures and Swaps: The MCV Partnership enters into natural gas futures,
options, and over-the-counter swap transactions in order to hedge against
unfavorable changes in the market price of natural gas. The MCV Partnership uses
these financial instruments to:

     - ensure an adequate supply of natural gas for the projected generation and
       sales of electricity and steam, and

     - manage price risk by fixing the price to be paid for natural gas on some
       of its long-term gas contracts.

     At December 31, 2005, the MCV Partnership only held natural gas futures and
swaps. Because of increases in the market price of natural gas, the fair value
of these contracts increased significantly during 2005. As a result of
mark-to-market gains, we have recorded derivative assets totaling $223 million
associated with the fair value of these contracts on our Consolidated Balance
Sheets. Certain of these contracts, representing $172 million, qualify for cash
flow hedge accounting and we record our proportionate share of their
mark-to-market gains and losses in Accumulated other comprehensive income. The
remaining contracts, representing $51 million, are not cash flow hedges and
their mark-to-market gains and losses are recorded to earnings.

     The contracts that qualify as cash flow hedges are used to ensure an
adequate supply of natural gas for the projected generation and sales of
electricity and steam. At December 31, 2005, we have recorded a cumulative net
gain of $56 million, net of tax and minority interest, in Accumulated other
comprehensive income relating to our proportionate share of the cash flow hedges
held by the MCV Partnership. Of this balance, we expect to reclassify $15
million, net of tax and minority interest, as an increase to earnings during the
next 12 months as the contracts settle, offsetting the costs of gas purchases,
with the remainder to be realized through 2009. There was no ineffectiveness
associated with any of these cash flow hedges.

     The futures and swap contracts that do not qualify as cash flow hedges are
used by the MCV Partnership to manage price risk by fixing the price to be paid
for natural gas on some of its variable-priced long-term gas contracts. Prior to
the implementation of the RCP, these futures and swap contracts were accounted
for as cash flow hedges. Since the RCP was implemented in January 2005, these
instruments no longer qualify for cash flow hedge accounting. As a result, we
reclassified a $29 million gain ($9 million, net of tax and minority interest)
to earnings because the hedged forecasted transactions are no longer probable.
Additionally, for the year ended December 31, 2005, we recorded an additional
$22 million gain associated with the increase in fair value of these
instruments. The total gain recognized from these instruments, $51 million
before considering tax effects and minority interest, is included in the total
Fuel costs mark-to-market at MCV on our Consolidated Statements of Income
(Loss). Because of the volatility of the natural gas market, the MCV Partnership
expects future earnings volatility on these contracts, since gains and losses
will be recorded each quarter. We expect almost all of these futures and swap
contracts to be realized during 2006 as the contracts settle, with the remainder
to be realized during 2007. For further details on the RCP, see Note 3,
Contingencies, "Other Electric Contingencies -- The Midland Cogeneration
Venture."

     The MCV Partnership also engages in cost mitigation activities to offset
fixed charges of operating the MCV Facility. These cost mitigation activities
may include the use of futures and options contracts to purchase and/or sell
natural gas in order to maximize the use of transportation and storage contracts
when they are not needed for operation of the MCV Facility. Although these cost
mitigation activities do serve to offset fixed monthly charges, these activities
are not considered a normal course of business for the MCV Partnership and do
not qualify as hedges. Therefore, the mark-to-market gains and losses from these
cost mitigation activities are recorded in

                                      CE-64
<PAGE>
                            CONSUMERS ENERGY COMPANY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

earnings each quarter. At December 31, 2005, the MCV Partnership did not hold
any futures or options for the purpose of these cost mitigation activities.

     CREDIT RISK: Our swaps, options, and forward contracts contain credit risk,
which is the risk that counterparties will fail to perform their contractual
obligations. We reduce this risk through established credit policies. For each
counterparty, we assess credit quality by using credit ratings, financial
condition, and other available information. We then establish a credit limit for
each counterparty based upon our evaluation of credit quality. We monitor the
degree to which we are exposed to potential loss under each contract and take
remedial action, if necessary.

     The MCV Partnership enters into contracts primarily with companies in the
electric and gas industry. This industry concentration may have an impact on our
exposure to credit risk, either positively or negatively, based on how these
counterparties are affected by similar changes in economic, weather, or other
conditions. The MCV Partnership typically use industry-standard agreements that
allow for netting positive and negative exposures associated with the same
counterparty, thereby reducing exposure. These contracts also typically provide
for the parties to demand adequate assurance of future performance when there
are reasonable grounds for doing so.

     The following table illustrates our exposure to potential losses as of
December 31, 2005, if each counterparty within this industry concentration
failed to perform its contractual obligations. This table includes contracts
accounted for as financial instruments. It does not include trade accounts
receivable, derivative contracts that qualify for the normal purchases and sales
exception under SFAS No. 133, or other contracts that are not accounted for as
derivatives.

<Table>
<Caption>

                                                                                      NET              NET
                                                                                    EXPOSURE FROM    EXPOSURE FROM
                                         EXPOSURE                                   INVESTMENT       INVESTMENT
                                          BEFORE          COLLATERAL     NET         GRADE            GRADE
                                         COLLATERAL(a)    HELD(b)       EXPOSURE    COMPANIES(c)     COMPANIES (%)
                                         -------------    ----------    --------    -------------    -------------
                                                              (IN MILLIONS)
<S>                                      <C>              <C>           <C>         <C>              <C>
MCV Partnership......................        $350            $189         $161          $133              83
</Table>

-------------------------
(a)  Exposure is reflected net of payables or derivative liabilities if netting
     arrangements exist.

(b)  Collateral held includes cash and letters of credit received from
     counterparties.

(c)  The remaining balance of our net exposure was from independent natural gas
     producers/suppliers that do not have published credit ratings. Based on
     internal credit reviews, we believe that these counterparties are
     financially strong and creditworthy.

     Based on our credit policies and our current exposures, we do not expect a
material adverse effect on our financial position or future earnings as a result
of counterparty nonperformance.

6: RETIREMENT BENEFITS

     We provide retirement benefits to our employees under a number of different
plans, including:

     - non-contributory, defined benefit Pension Plan,

     - a cash balance pension plan for certain employees hired after June 30,
       2003,

     - a DCCP for employees hired on or after September 1, 2005,

     - benefits to certain management employees under SERP,

     - a defined contribution 401(k) Savings Plan,

                                      CE-65
<PAGE>
                            CONSUMERS ENERGY COMPANY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     - benefits to a select group of management under EISP, and

     - health care and life insurance benefits under OPEB.

     Pension Plan: The Pension Plan includes funds for most of our current
employees, our non-utility affiliates, and Panhandle, a former affiliate. The
Pension Plan's assets are not distinguishable by company.

     On September 1, 2005, we implemented the DCCP. DCCP provides an employer
cash contribution of 5 percent of base pay to the existing Employees' Savings
Plan. No employee contribution is required in order to receive the plan's
employer contribution. All employees hired on and after September 1, 2005
participate in this plan as part of their retirement benefit program. Cash
balance pension plan participants also participate in the DCCP as of September
1, 2005. Additional pay credits under the cash balance pension plan were
discontinued as of that date. The DCCP cost for the period ended December 31,
2005 was less than $1 million.

     SERP: SERP benefits are paid from a trust established in 1988. SERP is not
a qualified plan under the Internal Revenue Code; SERP trust earnings are
taxable and trust assets are included in consolidated assets. Trust assets were
$30 million at December 31, 2005 and $30 million at December 31, 2004. The
assets are classified as Other non-current assets on our Consolidated Balance
Sheets. The ABO for SERP was $35 million at December 31, 2005 and $30 million at
December 31, 2004.

     401(k): The employer's match for the 401(k) Savings Plan, which was
suspended on September 1, 2002, resumed on January 1, 2005. The employer's match
is in CMS Energy Common Stock. On September 1, 2005, employees enrolled in the
company's 401(k) Savings Plan had their employer match increased from 50 percent
to 60 percent on eligible contributions up to the first six percent of an
employee's wages. The total 401(k) Savings Plan cost for the year ended December
31, 2005 was $12 million.

     The MCV Partnership sponsors a defined contribution retirement plan
covering all employees. Under the terms of the plan, the MCV Partnership makes
contributions of either 5 or 10 percent of an employee's eligible annual
compensation dependent upon the employee's age. The MCV Partnership also
sponsors a 401(k) savings plan for employees. Contributions and costs for this
plan are based on matching an employee's savings up to a maximum level. Amounts
contributed under these plans were $1 million in 2005 and 2004.

     EISP: We implemented an EISP in 2002 to provide flexibility in separation
of employment by officers, a select group of management, or other highly
compensated employees. Terms of the plan may include payment of a lump sum,
payment of monthly benefits for life, payment of premium for continuation of
health care, or any other legally permissible term deemed to be in our best
interest to offer. The EISP expense was less than $1 million for each of the
years ended December 31, 2005 and 2004. The ABO for the EISP was less than $1
million at December 31, 2005 and at December 31, 2004.

     OPEB: The OPEB plan covers all regular full-time employees covered by the
employee health care plan on a company-subsidized basis the day before they
retire from the company at age 55 or older and who have at least ten full years
of applicable continuous service. Regular full-time employees who qualify for a
disability retirement and have 15 years of applicable continuous service are
also eligible. Retiree health care costs at December 31, 2005 are based on the
assumption that costs would increase 10 percent in 2005. The rate of increase is
expected to be 10 percent for 2006. The rate of increase is expected to slow to
an estimated 5 percent by 2011 and thereafter.

     The MCV Partnership sponsors defined cost postretirement health care plans
that cover all full-time employees, except key management. Participants in the
postretirement health care plans become eligible for the benefits if they retire
on or after the attainment of age 65 or upon a qualified disability retirement,
or if they have 10 or more years of service and retire at age 55 or older. The
ABO of the MCV Partnership's postretirement plans was $5 million at December 31,
2005 and 2004. The MCV Partnership's net periodic postretirement health care
cost for 2005 and 2004 was less than $1 million.

                                      CE-66
<PAGE>
                            CONSUMERS ENERGY COMPANY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     The health care cost trend rate assumption affects the estimated costs
recorded. A one percentage point change in the assumed health care cost trend
assumption would have the following effects:

<Table>
<Caption>
                                                                ONE PERCENTAGE    ONE PERCENTAGE
                                                                POINT INCREASE    POINT DECREASE
                                                                --------------    --------------
                                                                         (IN MILLIONS)
<S>                                                             <C>               <C>
Effect on total service and interest cost component.........         $ 14             $ (12)
Effect on postretirement benefit obligation.................         $155             $(136)
</Table>

     We adopted SFAS No. 106, effective as of the beginning of 1992. Consumers
recorded a liability of $466 million for the accumulated transition obligation
and a corresponding regulatory asset for anticipated recovery in utility rates.
For additional details, see Note 1, Corporate Structure and Accounting Policies,
"Utility Regulation." The MPSC authorized recovery of the electric utility
portion of these costs in 1994 over 18 years and the gas utility portion in 1996
over 16 years.

     The measurement date for all CMS Energy plans is November 30 for 2005 and
2004, and December 31 for 2003. As a result of the measurement date change in
2004, we recorded a $1 million cumulative effect of change in accounting, net of
tax benefit, as a decrease to earnings. We also increased the amount of accrued
benefit cost on our Consolidated Balance Sheets by $2 million. The measurement
date for the MCV Partnership's plan is December 31 for 2005 and 2004.

     Assumptions: The following table recaps the weighted-average assumptions
used in our retirement benefits plans to determine benefit obligations and net
periodic benefit cost:

<Table>
<Caption>
                                                      PENSION & SERP                  OPEB
                                                  -----------------------    -----------------------
                                                  2005     2004     2003     2005     2004     2003
                                                  ----     ----     ----     ----     ----     ----
<S>                                               <C>      <C>      <C>      <C>      <C>      <C>
Discount rate.................................    5.75%    6.00%    6.25%    5.75%    6.00%    6.25%
Expected long-term rate of return on plan
  assets(a)...................................    8.50%    8.75%    8.75%
  Union.......................................                               8.25%    8.75%    8.75%
  Non-Union...................................                               8.25%    6.00%    6.00%
Rate of compensation increase:
  Pension.....................................    4.00%    3.50%    3.25%
  SERP........................................    5.50%    5.50%    5.50%
</Table>

-------------------------
(a)  We determine our long-term rate of return by considering historical market
     returns, the current and future economic environment, the capital market
     principles of risk and return, and the expert opinions of individuals and
     firms with financial market knowledge. We use the asset allocation of the
     portfolio to forecast the future expected total return of the portfolio.
     The goal is to determine a long-term rate of return that can be
     incorporated into the planning of future cash flow requirements in
     conjunction with the change in the liability. The use of forecasted returns
     for various classes of assets used to construct an expected return model is
     reviewed periodically for reasonableness and appropriateness.

                                      CE-67
<PAGE>
                            CONSUMERS ENERGY COMPANY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     Costs: The following table recaps the costs incurred in our retirement
benefits plans:

<Table>
<Caption>
                                                                   PENSION & SERP
                                                                ---------------------
YEARS ENDED DECEMBER 31                                         2005    2004     2003
-----------------------                                         ----    ----     ----
                                                                    (IN MILLIONS)
<S>                                                             <C>     <C>      <C>
Service cost................................................    $ 41    $  36    $ 39
Interest expense............................................      76       77      75
Expected return on plan assets..............................     (89)    (109)    (80)
Curtailment credit..........................................      --       --      --
Settlement charge...........................................      --       --      48
Amortization of:
  Net loss..................................................      33       14       9
  Prior service cost........................................       5        6       7
                                                                ----    -----    ----
Net periodic pension cost...................................    $ 66    $  24    $ 98
                                                                ====    =====    ====
</Table>

<Table>
<Caption>
                                                                        OPEB
                                                                --------------------
YEARS ENDED DECEMBER 31                                         2005    2004    2003
-----------------------                                         ----    ----    ----
                                                                   (IN MILLIONS)
<S>                                                             <C>     <C>     <C>
Service cost................................................    $ 21    $ 18    $ 17
Interest expense............................................      58      54      61
Expected return on plan assets..............................     (49)    (45)    (39)
Curtailment credit..........................................      --      --      --
Amortization of:
  Net loss..................................................      20      11      18
  Prior service cost........................................      (9)     (8)     (6)
                                                                ----    ----    ----
Net periodic postretirement benefit cost....................    $ 41    $ 30    $ 51
                                                                ====    ====    ====
</Table>

                                      CE-68
<PAGE>
                            CONSUMERS ENERGY COMPANY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     Reconciliations: The following table reconciles the funding of our
retirement benefits plans with our retirement benefits plans' liability:

<Table>
<Caption>
                                                       PENSION PLAN          SERP             OPEB
                                                     ----------------    ------------    ---------------
YEARS ENDED DECEMBER 31                               2005      2004     2005    2004     2005     2004
-----------------------                               ----      ----     ----    ----     ----     ----
                                                                        (IN MILLIONS)
<S>                                                  <C>       <C>       <C>     <C>     <C>       <C>
Benefit obligation at beginning of period........    $1,328    $1,189    $ 40    $ 22    $1,013    $ 812
Service cost.....................................        42        35       1       1        21       18
Interest cost....................................        78        74       3       3        58       54
Plan amendment...................................        39        --       1      --       (19)      --
Employee transfers...............................        --        --      --      12        --       --
Actuarial loss...................................       146       138       2       3        39      168
Benefits paid....................................      (123)     (108)     (1)     (1)      (47)     (39)
                                                     ------    ------    ----    ----    ------    -----
Benefit obligation at end of period(a)...........     1,510     1,328      46      40     1,065    1,013
                                                     ------    ------    ----    ----    ------    -----
Plan assets at fair value at beginning of
  period.........................................     1,040     1,067      --      --       598      564
Actual return on plan assets.....................       101        81      --      --        42       25
Company contribution.............................        --        --       2      --        62       48
Actual benefits paid.............................      (123)     (108)     (2)     --       (47)     (39)
                                                     ------    ------    ----    ----    ------    -----
Plan assets at fair value at end of period.......     1,018     1,040      --      --       655      598
                                                     ------    ------    ----    ----    ------    -----
Benefit obligation in excess of plan assets......      (492)     (288)    (46)    (40)     (410)    (415)
Unrecognized net loss from experience different
  than assumed...................................       747       642       8       6       374      347
Unrecognized prior service cost (benefit)........        56        23       2      --      (109)     (99)
                                                     ------    ------    ----    ----    ------    -----
Net Balance Sheet Asset (Liability)..............       311       377     (36)    (34)     (145)    (167)
Additional VEBA Contributions or Non-Trust
  Benefit Payments...............................        --        --      --      --        15       15
Minimum liability(b).............................      (481)     (419)     --      --        --       --
                                                     ------    ------    ----    ----    ------    -----
Total Net Balance Sheet Asset (Liability)........    $ (170)   $  (42)   $(36)   $(34)   $ (130)   $(152)
                                                     ======    ======    ====    ====    ======    =====
</Table>

-------------------------
(a)  The Medicare Prescription Drug, Improvement and Modernization Act of 2003
     was signed into law in December 2003. The Act establishes a prescription
     drug benefit under Medicare (Medicare Part D), and a federal subsidy, which
     is tax-exempt, to sponsors of retiree health care benefit plans that
     provide a benefit that is actuarially equivalent to Medicare Part D.

     Our plan is actuarially equivalent to Medicare Part D and we have
     incorporated, retroactively, the effects of the subsidy into our financial
     statements at June 30, 2004, in accordance with FASB Staff Position, No.
     SFAS 106-2. We remeasured our obligation at December 31, 2003 to
     incorporate the impact of the Act, which resulted in a reduction to the
     accumulated postretirement benefit obligation of $148 million. The
     implementation resulted in a reduction of OPEB cost of $23 million for 2005
     and 2004. The reduction of $23 million includes $6 million for the year
     ended December 31, 2005 and $7 million for the year ended December 31, 2004
     in capitalized OPEB costs.

(b) The Pension Plan's ABO of $1.188 billion exceeded the value of the Pension
    Plan assets and net balance sheet asset at December 31, 2005. As a result,
    we recorded a minimum liability of $481 million. Consistent with MPSC
    guidance, Consumers recognized the cost of their minimum liability as a
    regulatory asset. Accordingly, Consumers minimum liability includes an
    intangible asset of $52 million and a regulatory asset of $399 million. The
    ABO for the Pension Plan was $1.082 billion at December 31, 2004.

    We remeasured our Pension and OPEB obligations at April 30, 2005 to
    incorporate the effects of the collective bargaining agreement reached
    between the Utility Workers Union of America and Consumers. The

                                      CE-69
<PAGE>
                            CONSUMERS ENERGY COMPANY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

    net periodic pension cost increased $13 million for 2005 and OPEB benefit
    costs increased by $2 million for 2005.

     Plan Assets: The following table recaps the categories of plan assets in
our retirement benefits plans:

<Table>
<Caption>
                                                                   PENSION               OPEB
                                                                --------------      --------------
                                                                2005      2004      2005      2004
                                                                ----      ----      ----      ----
<S>                                                             <C>       <C>       <C>       <C>
Asset Category:
  Fixed Income..............................................    33%       34%       58%       45%
  Equity Securities:........................................    65%       61%       40%       54%
     CMS Energy Common Stock(a).............................     --        5%        1%        1%
  Alternative Strategy......................................     2%        --        1%        --
</Table>

-------------------------
(a)  At November 30, 2005, there were zero shares of CMS Energy Common Stock in
     the Pension Plan assets, and 143,200 shares in the OPEB plan assets with a
     fair value of $2 million. At November 30, 2004, there were 4,892,000 shares
     of CMS Energy Common Stock in the Pension Plan assets with a fair value of
     $50 million, and 493,000 shares in the OPEB plan assets with a fair value
     of $5 million.

     We contributed $62 million to our OPEB plan in 2005 and we plan to
contribute $62 million to our OPEB plan in 2006. We did not contribute to our
Pension Plan in 2005 and we plan to contribute $12 million to our Pension Plan
in 2006.

     We have established a target asset allocation for our Pension Plan assets
of 60 percent equity, 30 percent fixed income, and 10 percent alternative
strategy investments to maximize the long-term return on plan assets, while
maintaining a prudent level of risk. The level of acceptable risk is a function
of the liabilities of the plan. Equity investments are diversified across the
Standard & Poor's 500 Index, with lesser allocations to the Standard & Poor's
Mid Cap, the Small Cap Indexes and a Foreign Equity Index Fund. Fixed-income
investments are diversified across investment grade instruments of both
government and corporate issuers. Alternative strategies are diversified across
absolute return investment approaches and global tactical asset allocation.
Annual liability measurements, quarterly portfolio reviews, and periodic
asset/liability studies are used to evaluate the need for adjustments to the
portfolio allocation.

     We have established union and non-union VEBA trusts to fund our future
retiree health and life insurance benefits. These trusts are funded through the
ratemaking process for Consumers, and through direct contributions from the
non-utility subsidiaries. The equity portions of the union and non-union health
care VEBA trusts are invested in a Standard & Poor's 500 Index fund. The
fixed-income portion of the union health care VEBA trust is invested in domestic
investment grade taxable instruments. The fixed-income portion of the non-union
health care VEBA trust is invested in a diversified mix of domestic tax-exempt
securities. The investment selections of each VEBA are influenced by the tax
consequences, as well as the objective of generating asset returns that will
meet the medical and life insurance costs of retirees.

                                      CE-70
<PAGE>
                            CONSUMERS ENERGY COMPANY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     Benefit Payments: The expected benefit payments for each of the next five
years and the five-year period thereafter are as follows:

<Table>
<Caption>

                                                                PENSION    SERP    OPEB(a)
                                                                -------    ----    -------
                                                                      (IN MILLIONS)
<S>                                                             <C>        <C>     <C>
2006........................................................     $ 57       $1      $ 51
2007........................................................       59        1        54
2008........................................................       65        1        55
2009........................................................       76        1        57
2010........................................................       88        1        59
2011-2015...................................................      591        6       321
</Table>

-------------------------
(a)  OPEB benefit payments are net of employee contributions and expected
     Medicare Part D prescription drug subsidy payments.

7: ASSET RETIREMENT OBLIGATIONS

     SFAS NO. 143: This standard became effective January 2003. It requires
companies to record the fair value of the cost to remove assets at the end of
their useful life, if there is a legal obligation to remove them. We have legal
obligations to remove some of our assets, including our nuclear plants, at the
end of their useful lives. As required by SFAS No. 71, we accounted for the
implementation of this standard by recording regulatory assets and liabilities
instead of a cumulative effect of a change in accounting principle.

     The fair value of ARO liabilities has been calculated using an expected
present value technique. This technique reflects assumptions such as costs,
inflation, and profit margin that third parties would consider to assume the
settlement of the obligation. Fair value, to the extent possible, should include
a market risk premium for unforeseeable circumstances. No market risk premium
was included in our ARO fair value estimate since a reasonable estimate could
not be made. If a five percent market risk premium were assumed, our ARO
liability would increase by $25 million.

     If a reasonable estimate of fair value cannot be made in the period in
which the ARO is incurred, such as for assets with indeterminate lives, the
liability is to be recognized when a reasonable estimate of fair value can be
made. Generally, gas transmission and electric and gas distribution assets have
indeterminate lives. Retirement cash flows cannot be determined and there is a
low probability of a retirement date. Therefore, no liability has been recorded
for these assets or associated obligations related to potential future
abandonment. In addition, no liability has been recorded for assets that have
insignificant cumulative disposal costs, such as substation batteries. The
measurement of the ARO liabilities for Palisades and Big Rock include use of
decommissioning studies that largely utilize third-party cost estimates.

     FASB INTERPRETATION NO. 47, ACCOUNTING FOR CONDITIONAL ASSET RETIREMENT
OBLIGATIONS: This Interpretation clarified the term "conditional asset
retirement obligation" as used in SFAS No. 143. The term refers to a legal
obligation to perform an asset retirement activity in which the timing and (or)
method of settlement are conditional on a future event. We determined that
abatement of asbestos included in our plant investments qualify as a conditional
ARO, as defined by FASB Interpretation No. 47. Our asbestos abatement ARO is
included in the tables within this footnote. This Interpretation is effective
for us on December 31, 2005.

                                      CE-71
<PAGE>
                            CONSUMERS ENERGY COMPANY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     The following tables describe our assets that have legal obligations to be
removed at the end of their useful life:

<Table>
<Caption>
                                           IN SERVICE
ARO DESCRIPTION                               DATE                LONG LIVED ASSETS               TRUST FUND
---------------                            ----------             -----------------               ----------
                                                                                                 (IN MILLIONS)
<S>                                        <C>           <C>                                     <C>
December 31, 2005
  Palisades -- decommission plant
     site..............................        1972      Palisades nuclear plant                     $545
  Big Rock -- decommission plant
     site..............................        1962      Big Rock nuclear plant                        10
  JHCampbell intake/discharge water
     line..............................        1980      Plant intake/discharge water line             --
  Closure of coal ash disposal areas...     Various      Generating plants coal ash areas              --
  Closure of wells at gas storage
     fields............................     Various      Gas storage fields                            --
  Indoor gas services equipment
     relocations.......................     Various      Gas meters located inside structures          --
  Asbestos abatement...................        1973      Electric and gas utility plant                --
</Table>

<Table>
<Caption>
                                                ARO                                                           ARO
                                             LIABILITY                                        CASH FLOW    LIABILITY
ARO DESCRIPTION                               1/1/04      INCURRED    SETTLED    ACCRETION    REVISIONS    12/31/04
---------------                              ---------    --------    -------    ---------    ---------    ---------
                                                                          (IN MILLIONS)
<S>                                          <C>          <C>         <C>        <C>          <C>          <C>
Palisades -- decommission................      $268         $--        $ --         $22          $60         $350
Big Rock -- decommission.................        34          --         (40)         14           22           30
JHCampbell intake line...................        --          --          --          --           --           --
Coal ash disposal areas..................        53          --          (4)          5           --           54
Wells at gas storage fields..............         2          --          (1)         --           --            1
Indoor gas services relocations..........         1          --          --          --           --            1
                                               ----         ---        ----         ---          ---         ----
Total prior to FIN 47 adoption...........       358          --         (45)         41           82          436
Asbestos abatement (FIN 47)..............        31          --          --           2           --           33
                                               ----         ---        ----         ---          ---         ----
Total upon adoption of FIN 47............      $389         $--        $(45)        $43          $82         $469
                                               ====         ===        ====         ===          ===         ====
</Table>

<Table>
<Caption>
                                                ARO                                                           ARO
                                             LIABILITY                                        CASH FLOW    LIABILITY
ARO DESCRIPTION                              12/31/04     INCURRED    SETTLED    ACCRETION    REVISIONS    12/31/05
---------------                              ---------    --------    -------    ---------    ---------    ---------
                                                                          (IN MILLIONS)
<S>                                          <C>          <C>         <C>        <C>          <C>          <C>
Palisades -- decommission................      $350         $--        $ --         $25          $--         $375
Big Rock -- decommission.................        30          --         (42)         15           24           27
JHCampbell intake line...................        --          --          --          --           --           --
Coal ash disposal areas..................        54          --          (5)          5           --           54
Wells at gas storage fields..............         1          --          --          --           --            1
Indoor gas services relocations..........         1          --          --          --           --            1
                                               ----         ---        ----         ---          ---         ----
Total prior to FIN 47 adoption...........       436          --         (47)         45           24          458
Asbestos abatement (FIN 47)..............        33          --          --           3           --           36
                                               ----         ---        ----         ---          ---         ----
Total upon adoption of FIN 47............      $469         $--        $(47)        $48          $24         $494
                                               ====         ===        ====         ===          ===         ====
</Table>

     The ARO liability at January 1, 2004 and December 31, 2004 in the preceding
tables reflect the ARO liability as if FASB Interpretation No. 47 had been in
effect at that time, as required by the Interpretation. Our financial statements
for those periods do not reflect the asbestos abatement ARO. As required by SFAS
No. 71, we accounted for the implementation of this Interpretation by recording
a regulatory asset instead of a cumulative effect of a change in accounting
principle. There was no effect on net income.

     In October 2004, the MPSC initiated a generic proceeding to review SFAS No.
143, FERC Order No. 631, Accounting, Financial Reporting, and Rate Filing
Requirements for Asset Retirement Obligations, and related

                                      CE-72
<PAGE>
                            CONSUMERS ENERGY COMPANY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

accounting and ratemaking issues for MPSC-jurisdictional electric and gas
utilities. Utilities filed responses to the Order in March 2005; the MPSC Staff
and intervenors filed responses in May 2005. On December 5, 2005, the ALJ issued
a proposal for decision recommending that the MPSC dismiss the proceeding.
Exceptions and replies to exceptions have been filed. We consider the proceeding
a clarification of accounting and reporting issues that relate to all Michigan
utilities. We cannot predict the outcome of the proceeding.

8: INCOME TAXES

     We join in the filing of a consolidated federal income tax return with CMS
Energy and its subsidiaries. Income taxes generally are allocated based on each
company's separate taxable income in accordance with the CMS Energy tax sharing
agreement. We had tax related payables to CMS Energy of $128 million in 2005 and
tax related receivables from CMS Energy of $4 million in 2004.

     We utilize deferred tax accounting for temporary differences. These occur
when there are differences between the book and tax carrying amounts of assets
and liabilities. ITC has been deferred and is being amortized over the estimated
service life of related properties. We use ITC to reduce current income taxes
payable.

     AMT paid generally becomes a tax credit that we can carry forward
indefinitely to reduce regular tax liabilities in future periods when regular
taxes paid exceed the tax calculated for AMT. At December 31, 2005, we had AMT
credit carryforwards in the amount of $21 million that do not expire, tax loss
carryforwards in the amount of $98 million that expire in 2021 through 2024, and
charitable contribution carryforwards in the amount of $13 million that expire
in 2006 through 2009. We do not believe that a valuation allowance is required
as we expect to utilize all of the carryforwards prior to their expiration.

     The significant components of income tax expense (benefit) consisted of:

<Table>
<Caption>
YEARS ENDED DECEMBER 31                                         2005    2004    2003
-----------------------                                         ----    ----    ----
                                                                   (IN MILLIONS)
<S>                                                             <C>     <C>     <C>
Current federal income taxes................................    $176    $ 26    $(58)
Current federal income tax benefit of operating loss
  carryforwards.............................................      (9)    (11)     --
Deferred federal income taxes...............................    (201)    142     201
Deferred ITC, net...........................................     (13)     (5)     (6)
                                                                ----    ----    ----
Income tax (benefit) expense................................    $(47)   $152    $137
                                                                ====    ====    ====
</Table>

     Deferred tax assets and liabilities are recognized for the estimated future
tax effect of temporary differences between the tax basis of assets or
liabilities and the reported amounts in the financial statements. Deferred tax
assets and liabilities are classified as current or non-current according to the
classification of the related assets or liabilities. Deferred tax assets and
liabilities not related to assets or liabilities are classified according to the
expected reversal date of the temporary differences.

                                      CE-73
<PAGE>
                            CONSUMERS ENERGY COMPANY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     The principal components of our deferred tax assets (liabilities)
recognized in the balance sheet are as follows:

<Table>
<Caption>
DECEMBER 31                                                      2005       2004
-----------                                                      ----       ----
                                                                  (IN MILLIONS)
<S>                                                             <C>        <C>
Property....................................................    $  (748)   $  (840)
Consolidated investments....................................        (54)      (214)
Securitized costs...........................................       (172)      (176)
Gas inventories.............................................       (148)      (126)
Employee benefits...........................................        (61)       (79)
SFAS No. 109 regulatory liability, net......................        159        152
Nuclear decommissioning.....................................         59         63
Tax loss and credit carryforwards...........................         60         52
Valuation allowance.........................................         --         (9)
Other, net..................................................       (177)      (117)
                                                                -------    -------
Net deferred tax liabilities................................    $(1,082)   $(1,294)
                                                                =======    =======
Deferred tax liabilities....................................    $(2,093)   $(2,102)
Deferred tax assets, net of valuation allowance.............      1,011        808
                                                                -------    -------
Net deferred tax liabilities................................    $(1,082)   $(1,294)
                                                                =======    =======
</Table>

     In August 2005, the IRS issued Revenue Ruling 2005-53 and regulations to
provide guidance with respect to the use of the "simplified service cost" method
of tax accounting. We use this tax accounting method, generally allowed by the
IRS under section 263A of the Internal Revenue Code, with respect to the
allocation of certain corporate overheads to the tax basis of self-constructed
utility assets. Under the IRS guidance, significant issues with respect to the
application of this method remain unresolved and subject to dispute. However,
the effect of the IRS's position may be to require Consumers either (1) to repay
a portion of previously received tax benefits, or (2) to add back to taxable
income, half in each of 2005 and 2006, a significant portion of previously
deducted overheads. The impact of this matter on future earnings, cash flows, or
our present NOL carryforwards remains uncertain, but could be material. We have
recorded an increase in our taxable income of $359 million in 2005, and a
corresponding reduction in deferred taxes related to property, to reflect the
estimated 2005 effect of the new regulation.

                                      CE-74
<PAGE>
                            CONSUMERS ENERGY COMPANY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     The actual income tax expense differs from the amount computed by applying
the statutory federal tax rate of 35 percent to income before income taxes as
follows:

<Table>
<Caption>
YEARS ENDED DECEMBER 31                                         2005     2004     2003
-----------------------                                         ----     ----     ----
                                                                     (IN MILLIONS)
<S>                                                             <C>      <C>      <C>
Income (loss) before cumulative effect of change in
  accounting principle......................................    $ (96)   $ 280    $ 196
Income tax (benefit) expense................................      (47)     152      137
                                                                -----    -----    -----
Income (loss) before income taxes...........................     (143)     432      333
Statutory federal income tax rate...........................     X 35%    X 35%    X 35%
                                                                -----    -----    -----
Expected income tax (benefit) expense.......................      (50)     151      117
Increase (decrease) in taxes from:
  Property differences......................................       15       13       18
  Prior period accrual adjustments..........................        3       --       (2)
  Medicare part D exempt income.............................       (6)      (5)      --
  Loss on investment in CMS Energy Common Stock.............       --       --        4
  ITC amortization..........................................       (4)      (6)      (6)
  Expiration of general business credits....................        6       --       --
  Valuation allowance.......................................       (9)       1        8
  Other, net................................................       (2)      (2)      (2)
                                                                -----    -----    -----
Recorded income tax (benefit) expense.......................    $ (47)   $ 152    $ 137
                                                                =====    =====    =====
Effective tax rate..........................................     32.9%    35.2%    41.1%
                                                                =====    =====    =====
</Table>

     On December 31, 2005, $12 million of general business credit carryforwards,
net of federal income tax, expired for which a full valuation allowance had been
provided. The net change in the deferred tax asset of $12 million was offset by
the $9 million reduction in the valuation allowance and reversal of unamortized
ITC, net of federal income tax, of $6 million.

     The amount of income taxes we pay is subject to ongoing audits by federal,
state and foreign tax authorities, which can result in proposed assessments. The
"simplified service cost method" described above is currently under audit by the
IRS. Our estimate for the potential outcome for any uncertain tax issues is
highly judgmental. We believe that our accrued tax liabilities at December 31,
2005 are adequate for all years.

9: EXECUTIVE INCENTIVE COMPENSATION

     We provide a Performance Incentive Stock Plan (the Plan) to key employees
and non-employee directors or consultants based on their contributions to the
successful management of the company. The Plan has a 5-year term, expiring in
May 2009. The Plan includes the following types of awards:

     - restricted stock,

     - stock options,

     - stock appreciation rights,

     - phantom shares,

     - performance units, and

     - management stock purchases.

     Restricted shares of common stock are outstanding shares with full voting
and dividend rights. These awards vest 100 percent after three years and are
subject to achievement of specified levels of total shareholder return,
including a comparison to a peer group of companies. Some awards vest based
solely on continued employment.

                                      CE-75
<PAGE>
                            CONSUMERS ENERGY COMPANY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

These awards are subject to forfeiture if employment terminates before vesting.
Restricted shares vest fully if control of CMS Energy changes, as defined by the
Plan.

     Stock options give the holder the right to purchase common stock at a given
price over an extended period of time. Stock appreciation rights give the holder
the right to receive common stock appreciation, defined as the excess of the
market price of the stock at the date of exercise over the grant date price. All
stock options and stock appreciation rights are valued at fair market price when
granted. All options and rights may be exercised upon grant, and expire up to 10
years and one month from the date of grant.

     Phantom shares are valued at the fair market price of common stock when
granted. They give the holder the right to receive the appreciation value of
common stock on one or more valuation dates, according to a specified vesting
schedule determined at the time of grant. These shares are subject to forfeiture
if employment terminates before vesting.

     Performance units have an initial value that is established at the time of
grant. Performance criteria are established at the time of grant and, depending
upon the extent to which they are met, will determine the value of the payout,
which may be in the form of cash, common stock, or a combination of both. These
units are subject to forfeiture if employment terminates.

     Select participants may elect to receive all or a portion of their
incentive payments under the Officer's Incentive Compensation Plan in the form
of cash, shares of restricted common stock, shares of restricted stock units, or
any combination of these. These participants may also receive awards of
additional restricted common stock or restricted stock units, provided the total
value of these additional grants does not exceed $2.5 million for any fiscal
year.

     Under the Plan, shares awarded or subject to options, phantom shares, and
performance units may not exceed 6 million shares from June 2004 through May
2009, nor may such grants or awards to any participant exceed 250,000 shares in
any fiscal year.

     Shares for which payment or exercise is in cash, as well as shares or
options that are forfeited, may be awarded or granted again under the Plan.

     Awards of up to 4,931,130 shares of CMS Energy Common Stock may be issued
at December 31, 2005. All grants awarded under this Plan in 2005 were in the
form of restricted stock.

                                      CE-76
<PAGE>
                            CONSUMERS ENERGY COMPANY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     The following table summarizes restricted stock and stock option activity:

<Table>
<Caption>
                                                         RESTRICTED STOCK            STOCK OPTIONS
                                                         ----------------    -----------------------------
                                                            NUMBER OF        NUMBER OF    WEIGHTED AVERAGE
CMS ENERGY COMMON STOCK                                       SHARES          OPTIONS      EXERCISE PRICE
-----------------------                                     ---------        ---------    ----------------
<S>                                                      <C>                 <C>          <C>
Outstanding at January 1, 2003.......................         320,720        1,520,389         $25.58
Granted..............................................         441,897        1,105,490         $ 6.35
Shares Vested/Options Exercised......................         (22,812)              --             --
Forfeited or Expired.................................         (69,372)         (31,667)        $26.25
                                                            ---------        ---------         ------
Outstanding at December 31, 2003.....................         670,433        2,594,212         $17.37
Granted..............................................         399,122               --             --
Shares Vested/Options Exercised......................         (66,537)        (358,102)        $ 6.65
Forfeited or Expired.................................        (128,449)        (151,218)        $29.98
                                                            ---------        ---------         ------
Outstanding at December 31, 2004.....................         874,569        2,084,892         $18.30
Granted..............................................         418,385               --             --
Shares Vested/Options Exercised......................        (151,638)        (174,963)        $ 6.73
Forfeited or Expired.................................              --         (195,142)        $30.23
                                                            ---------        ---------         ------
Outstanding at December 31, 2005.....................       1,141,316        1,714,787         $18.13
                                                            =========        =========         ======
</Table>

     At December 31, 2005, 660,137 of the 1,141,316 shares of restricted stock
outstanding were subject to performance objectives.

     In December 2002, we adopted the fair value based method of accounting for
stock-based employee compensation under SFAS No. 123, as amended by SFAS No.
148. We elected to adopt the prospective method recognition provisions of this
Statement, which applies the recognition provisions to all awards granted,
modified, or settled after the beginning of the fiscal year that the recognition
provisions are first applied. Compensation expense for restricted stock was $3
million in 2005, $2 million in 2004, and $4 million in 2003. Compensation
expense for stock options was $3 million in 2003.

     The following table shows the weighted average grant date fair value of
restricted stock and stock options:

<Table>
<Caption>
YEARS ENDED DECEMBER 31                                          2005        2004       2003
-----------------------                                         -------      -----      -----
<S>                                                             <C>          <C>        <C>
Weighted Average Grant Date Fair Value
  Restricted Stock Granted..................................    $15.60       $9.36      $6.37
  Stock Options Granted.....................................        --(a)       --(a)   $3.04
</Table>

-------------------------
(a)  There were no stock option grants during 2005 or 2004.

                                      CE-77
<PAGE>
                            CONSUMERS ENERGY COMPANY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     We estimate the fair value of stock options using the Black-Scholes model.
We used the following assumptions in the Black-Scholes model:

<Table>
<Caption>

YEARS ENDED DECEMBER 31                                         2005(a)    2004(a) 2003
------------------------------------------------------------     ----      ----    -----
<S>                                                             <C>        <C>     <C>
CMS Energy Common Stock Options
  Risk-free interest rate...................................       --       --      3.23%
  Expected stock price volatility...........................       --       --     53.10%
  Expected dividend rate....................................       --       --        --
  Expected option life (years)..............................       --       --       4.7
</Table>

-------------------------
(a)  There were no stock option grants during 2005 or 2004.

     The following table summarizes our stock options outstanding at December
31, 2005:

<Table>
<Caption>
                                                      NUMBER OF
                                                       OPTIONS
                                                   OUTSTANDING AND     WEIGHTED AVERAGE    WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES                             EXERCISABLE        REMAINING LIFE      EXERCISE PRICE
------------------------                           ---------------     ----------------    ----------------
<S>                                                <C>                 <C>                 <C>
CMS Energy Common Stock:
  $6.35-$8.12..................................         847,075           7.48 years            $ 6.72
  $17.00-$22.20................................         348,632           5.46 years            $20.14
  $25.39-$31.04................................         230,468           4.42 years            $30.84
  $34.80-$43.38................................         288,612           2.87 years            $39.02
                                                      ---------           ----------            ------
  $6.35-$43.38.................................       1,714,787           5.88 years            $18.13
                                                      =========           ==========            ======
</Table>

     SFAS NO. 123(R) AND SAB NO. 107, SHARE-BASED PAYMENT: SFAS No. 123(R)
requires companies to use the fair value of employee stock options and similar
awards at the grant date to value the awards. Companies must expense this value
over the required service period of the awards. This Statement also clarifies
and expands SFAS No. 123's guidance in several areas, including measuring fair
value, classifying an award as equity or as a liability, and attributing
compensation cost to reporting periods including the timing of expense
recognition for share-based awards with terms that accelerate vesting upon
retirement. As a result of these clarifications, future compensation costs for
share-based awards with accelerated vesting provisions upon retirement will need
to be fully expensed by the period in which the employee becomes eligible to
retire. At December 31, 2005, unrecognized compensation cost for such
share-based awards held by retirement eligible employees was not material.

     SFAS No. 123(R) was effective for us on January 1, 2006. We elected to
adopt the modified prospective method recognition provisions of this Statement
instead of retrospective restatement. The modified prospective method applies
the recognition provisions to all awards granted or modified after the adoption
date of this Statement. We adopted the fair value method of accounting for
share-based awards effective December 2002. Therefore, SFAS No. 123(R) did not
have a significant impact on our results of operations when it became effective.

     The SEC issued SAB No. 107 to express the views of the Staff regarding the
interaction between SFAS No. 123(R) and certain SEC rules and regulations. Also,
the SEC issued SAB No. 107 to provide the Staff's views regarding the valuation
of share-based payments, including assumptions such as expected volatility and
expected term. We applied the additional guidance provided by SAB No. 107 upon
implementation of SFAS No. 123(R) with no impact on our results of operations.

                                      CE-78
<PAGE>
                            CONSUMERS ENERGY COMPANY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10: LEASES

     We lease various assets, including service vehicles, railcars, construction
equipment, office furniture, and buildings. Most of our leases contain options
at the end of the initial lease term to purchase the asset at fair value or
renew the lease at fair rental value. In November 2003, we exercised our
purchase option under the capital lease agreement for our main headquarters
building in Jackson, Michigan.

     We are authorized by the MPSC to record both capital and operating lease
payments as operating expense and recover the total cost from our customers. The
following table summarizes our capital and operating lease expenses:

<Table>
<Caption>
YEARS ENDED DECEMBER 31                                         2005    2004    2003
-----------------------                                         ----    ----    ----
                                                                   (IN MILLIONS)
<S>                                                             <C>     <C>     <C>
Capital lease expense(a)....................................    $14     $13     $17
Operating lease expense.....................................     17      13      13
</Table>

-------------------------
(a)  Capital lease obligations totaled $59 million at December 31, 2005.

     Minimum annual rental commitments under our non-cancelable leases at
December 31, 2005 are:

<Table>
<Caption>

                                                                CAPITAL    FINANCE     OPERATING
                                                                LEASES     LEASE(a)    LEASES
                                                                -------    --------    ---------
                                                                         (IN MILLIONS)
<S>                                                             <C>        <C>         <C>
2006........................................................      $14        $ 16        $ 19
2007........................................................       14          18          17
2008........................................................       12          20          17
2009........................................................       10          21          14
2010........................................................       10          18          12
2011 and thereafter.........................................       30         183          49
                                                                  ---        ----        ----
Total minimum lease payments................................       90         276        $128
                                                                                         ====
Less imputed interest.......................................       31          --
                                                                  ---        ----
Present value of net minimum lease payments.................       59         276
Less current portion........................................       11          16
                                                                  ---        ----
Non-current portion.........................................      $48        $260
                                                                  ===        ====
</Table>

-------------------------
(a)  In order to obtain permanent financing for the MCV Facility, the MCV
     Partnership entered into a sale and lease back agreement with a lessor
     group, which includes the FMLP, for substantially all of the MCV
     Partnership's fixed assets. In accordance with SFAS No. 98, the MCV
     Partnership accounts for the transaction as a financing arrangement. At
     December 31, 2005, finance lease obligations totaled $276 million, which
     represents the third-party portion of the MCV Partnership's finance lease
     obligation. Total charges under the MCV Partnership's finance lease
     obligation were $97 million in 2005 and $105 million in 2004. For
     additional details on transactions with the MCV Partnership and the FMLP,
     see Note 3, Contingencies, "Other Electric Contingencies -- The Midland
     Cogeneration Venture."

                                      CE-79
<PAGE>
                            CONSUMERS ENERGY COMPANY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

11: PROPERTY, PLANT, AND EQUIPMENT

     The following table is a summary of our Property, plant and equipment:

<Table>
<Caption>

                                                           ESTIMATED DEPRECIABLE
DECEMBER 31                                                LIFE IN YEARS(f)         2005     2004
---------------------------------------------------------  ---------------------   ------   ------
                                                                                    (IN MILLIONS)
<S>                                                        <C>                     <C>      <C>
Electric:
  Generation.............................................     13-105               $3,487   $3,433
  Distribution...........................................      12-75                4,226    4,069
  Other..................................................      7-50                   404      384
  Capital leases(a)......................................                              87       81
Gas:
  Underground storage facilities(b)......................      30-65                  262      255
  Transmission...........................................      15-75                  416      367
  Distribution...........................................      40-75                2,141    2,057
  Other..................................................      7-50                   306      290
  Capital leases(a)......................................                              26       26
Other:
  MCV Facility...........................................      5-35                   211    2,481
  Non-utility property...................................      7-71                    15       15
  Construction work-in-progress..........................                             509      353
  Other..................................................                               1       27
Less accumulated depreciation, depletion, and
  amortization(c)........................................                           4,804    5,665
                                                                                   ------   ------
Net property, plant, and equipment(d)(e).................                          $7,287   $8,173
                                                                                   ======   ======
</Table>

-------------------------
(a) Capital leases presented in this table are gross amounts. Accumulated
    amortization of capital leases was $54 million at December 31, 2005 and $49
    million at December 31, 2004. Capital lease additions were $12 million and
    capital lease retirements and adjustments were $7 million at December 31,
    2005. Capital lease additions were $3 million and capital lease retirements
    and adjustments were $1 million at December 31, 2004.

(b) Includes unrecoverable base natural gas in underground storage of $26
    million at December 31, 2005 and $26 million at December 31, 2004, which is
    not subject to depreciation.

(c) At December 31, 2005, accumulated depreciation, depletion, and amortization
    is comprised of $4.803 billion from public utility plant and $1 million from
    our non-utility plant assets. At December 31, 2004, accumulated
    depreciation, depletion, and amortization included $5.664 billion from our
    public utility plant and $1 million related to non-utility plant assets.

(d) At December 31, 2005, public utility plant additions were $450 million and
    public utility plant retirements, including other plant adjustments, were
    $64 million. At December 31, 2004, public utility plant additions were $547
    million and public utility plant retirements, including other plant
    adjustments, were $91 million.

(e) Included in net property, plant and equipment are intangible assets
    primarily related to software development costs, consents, leasehold
    improvements, and rights of way. The estimated amortization lives for
    software development costs are seven and twelve years. The estimated
    amortization life for leasehold improvements is the life of the lease. Other
    intangible amortization lives range from 50 to 105 years.

                                      CE-80
<PAGE>
                            CONSUMERS ENERGY COMPANY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     The following tables summarize our intangible assets:

<Table>
<Caption>
                                                                              ACCUMULATED     INTANGIBLE
DECEMBER 31, 2005                                               GROSS COST    AMORTIZATION    ASSET, NET
-----------------                                               ----------    ------------    ----------
                                                                             (IN MILLIONS)
<S>                                                             <C>           <C>             <C>
Software development........................................       $200           $135           $ 65
Rights of way...............................................        102             29             73
Leasehold improvements......................................         19             14              5
Franchises and consents.....................................         19              9             10
Other intangibles...........................................         18             13              5
                                                                   ----           ----           ----
  Total.....................................................       $358           $200           $158
                                                                   ====           ====           ====
</Table>

<Table>
<Caption>
                                                                              ACCUMULATED     INTANGIBLE
DECEMBER 31, 2004                                               GROSS COST    AMORTIZATION    ASSET, NET
-----------------                                               ----------    ------------    ----------
                                                                             (IN MILLIONS)
<S>                                                             <C>           <C>             <C>
Software development........................................       $179           $117           $ 62
Rights of way...............................................         93             28             65
Leasehold improvements......................................         20             13              7
Franchises and consents.....................................         19              9             10
Other intangibles...........................................         18             14              4
                                                                   ----           ----           ----
  Total.....................................................       $329           $181           $148
                                                                   ====           ====           ====
</Table>

     Pre-tax amortization expense related to these intangible assets was $19
million for the year ended December 31, 2005, $19 million for the year ended
December 31, 2004, and $19 million for the year ended December 31, 2003.
Intangible assets amortization is forecasted to range from $12 million to $22
million per year over the next five years.

     (f) The following table illustrates the depreciable life for electric and
gas structures and improvements:

<Table>
<Caption>
                                        ESTIMATED                                              ESTIMATED
                                       DEPRECIABLE                                            DEPRECIABLE
ELECTRIC                              LIFE IN YEARS    GAS                                   LIFE IN YEARS
--------                              -------------    ---                                   -------------
<S>                                   <C>              <C>                                   <C>
Generation:                                            Underground storage facilities....        45-50
  Coal............................        39-43        Transmission......................           60
  Nuclear.........................        17-25        Distribution......................           50
  Hydroelectric...................        55-71        Other.............................           50
  Other...........................           32
Distribution......................        50-60
Other.............................        40-42
</Table>

                                      CE-81
<PAGE>
                            CONSUMERS ENERGY COMPANY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

12: JOINTLY OWNED REGULATED UTILITY FACILITIES

     We have investments in jointly owned regulated utility facilities as shown
in the following table:

<Table>
<Caption>
                                                                                      CONSTRUCTION
                                                           NET         ACCUMULATED       WORK IN
                                          OWNERSHIP   INVESTMENT(A)   DEPRECIATION      PROGRESS
                                            SHARE     -------------   -------------   -------------
DECEMBER 31                               (PERCENT)   2005    2004    2005    2004    2005    2004
-----------                               ---------   -----   -----   -----   -----   -----   -----
                                                                (IN MILLIONS)
<S>                                       <C>         <C>     <C>     <C>     <C>     <C>     <C>
Campbell Unit 3.........................      93.3    $270    $284    $354    $339    $258    $158
Ludington...............................      51.0      72      79      92      91       1      --
Distribution............................   Various     100      77      45      33       9       6
</Table>

-------------------------
(a)  Net investment is the amount of utility plant in service less accumulated
     depreciation.

     The direct expenses of the jointly owned plants are included in operating
expenses. Operation, maintenance, and other expenses of these jointly owned
utility facilities are shared in proportion to each participant's undivided
ownership interest. We are required to provide only our share of financing for
the jointly owned utility facilities.

13: REPORTABLE SEGMENTS

     Our reportable segments are strategic business units organized and managed
by the nature of the products and services each provides. We evaluate
performance based upon the net income of each segment. We operate principally in
two segments, electric utility and gas utility.

     The electric utility segment consists of regulated activities associated
with the generation and distribution of electricity in the state of Michigan.
The gas utility segment consists of regulated activities associated with the
transportation, storage, and distribution of natural gas in the state of
Michigan.

     Accounting policies of our segments are the same as we describe in the
summary of significant accounting policies. Our financial statements reflect the
assets, liabilities, revenues, and expenses directly related to the electric and
gas segment where it is appropriate. We allocate accounts between the electric
and gas segments where common accounts are attributable to both segments. The
allocations are based on certain measures of business activities, such as
revenue, labor dollars, customers, other operation and maintenance expense,
construction expense, leased property, taxes or functional surveys. For example,
customer receivables are allocated based on revenue. Pension provisions are
allocated based on labor dollars.

     We account for inter-segment sales and transfers at current market prices
and eliminate them in consolidated net income (loss) available to common
stockholder by segment. The "Other" segment includes our consolidated special
purpose entity for the sale of trade receivables, the MCV Partnership and the
FMLP.

     The following table shows our financial information by reportable segment:

<Table>
<Caption>
YEARS ENDED DECEMBER 31                                          2005       2004       2003
-----------------------                                         -------    -------    -------
                                                                        (IN MILLIONS)
<S>                                                             <C>        <C>        <C>
Operating Revenues
  Electric..................................................    $ 2,701    $ 2,586    $ 2,590
  Gas.......................................................      2,483      2,081      1,845
  Other.....................................................         48         44         --
                                                                -------    -------    -------
                                                                $ 5,232    $ 4,711    $ 4,435
                                                                =======    =======    =======
Earnings from Equity Method Investees
  Other.....................................................    $     1    $     1    $    42
                                                                =======    =======    =======
</Table>

                                      CE-82
<PAGE>
                            CONSUMERS ENERGY COMPANY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

<Table>
<Caption>
YEARS ENDED DECEMBER 31                                          2005       2004       2003
-----------------------                                         -------    -------    -------
                                                                        (IN MILLIONS)
<S>                                                             <C>        <C>        <C>
Depreciation, Depletion and Amortization
  Electric..................................................    $   292    $   189    $   247
  Gas.......................................................        117        112        128
  Other.....................................................         75         90          2
                                                                -------    -------    -------
                                                                $   484    $   391    $   377
                                                                =======    =======    =======
Interest Charges
  Electric..................................................    $   133    $   204    $   164
  Gas.......................................................         68         65         51
  Other.....................................................         71         97         30
                                                                -------    -------    -------
                                                                $   272    $   366    $   245
                                                                =======    =======    =======
Income Tax (Benefit) Expense
  Electric..................................................    $    85    $   120    $    90
  Gas.......................................................         39         40         35
  Other.....................................................       (171)        (8)        12
                                                                -------    -------    -------
                                                                $   (47)   $   152    $   137
                                                                =======    =======    =======
Net Income (Loss) Available to Common Stockholder
  Electric..................................................    $   153    $   222    $   167
  Gas.......................................................         48         71         38
  Other.....................................................       (299)       (16)       (11)
                                                                -------    -------    -------
                                                                $   (98)   $   277    $   194
                                                                =======    =======    =======
Investments in Equity Method Investees
  Electric..................................................    $     3    $     3    $     2
  Other(a)..................................................          4         16        659
                                                                -------    -------    -------
                                                                $     7    $    19    $   661
                                                                =======    =======    =======
Total Assets
  Electric(b)...............................................    $ 7,743    $ 7,289    $ 6,831
  Gas(b)....................................................      3,600      3,187      2,983
  Other.....................................................      1,814      2,335        931
                                                                -------    -------    -------
                                                                $13,157    $12,811    $10,745
                                                                =======    =======    =======
Capital Expenditures(c)
  Electric..................................................    $   384    $   360    $   310
  Gas.......................................................        168        137        135
  Other.....................................................         32         21         --
                                                                -------    -------    -------
                                                                $   584    $   518    $   445
                                                                =======    =======    =======
</Table>

-------------------------
(a)  At December 31, 2003, the trusts that hold the mandatorily redeemable Trust
     Preferred Securities were deconsolidated. The trusts are now included on
     our Consolidated Balance Sheets as Investments -- Other.

(b)  Amounts include a portion of our other common assets attributable to both
     the electric and gas utility businesses.

(c)  Amounts include electric restructuring implementation plan, purchase of
     nuclear fuel, and capital lease additions. Amounts also include a portion
     of capital expenditures for plant and equipment attributable to both the
     electric and gas utility businesses.

                                      CE-83
<PAGE>
                            CONSUMERS ENERGY COMPANY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

14: CONSOLIDATION OF VARIABLE INTEREST ENTITIES

     We are the primary beneficiary of both the MCV Partnership and the FMLP. We
have a 49 percent partnership interest in the MCV Partnership and a 46.4 percent
partnership interest in the FMLP. Consumers is the primary purchaser of power
from the MCV Partnership through a long-term power purchase agreement. The FMLP
holds a 75.5 percent lessor interest in the MCV Facility, which results in
Consumers holding a 35 percent lessor interest in the MCV Facility.
Collectively, these interests make us the primary beneficiary of these entities.
Therefore, we consolidated these partnerships into our consolidated financial
statements as of and for the years ended December 31, 2005 and December 31,
2004.

     These partnerships have third-party obligations totaling $482 million at
December 31, 2005 and $582 million at December 31, 2004. Property, plant, and
equipment serving as collateral for these obligations has a carrying value of
$224 million at December 31, 2005 and $1.426 billion at December 31, 2004. The
creditors of these partnerships do not have recourse to the general credit of
Consumers.

     At December 31, 2005, the MCV Partnership had total assets of $1.318
billion and a net loss of $917 million for the year. At December 31, 2004, the
MCV Partnership had total assets of $1.980 billion and a net loss of $24 million
for the year.

     SUMMARIZED FINANCIAL INFORMATION OF SIGNIFICANT RELATED ENERGY
SUPPLIER: For 2003, the MCV Partnership was accounted for as an equity method
investment. Our 49 percent investment in the MCV Partnership was $419 million at
December 31, 2003. Our 2003 obligation to purchase electric capacity from the
MCV Partnership provided 15 percent of our owned and contracted electric
generating capacity. Summarized income statement information of the MCV
Partnership follows:

<Table>
<Caption>
YEAR ENDED DECEMBER 31                                              2003
----------------------                                              ----
                                                                (IN MILLIONS)
<S>                                                             <C>
Operating revenue(a)........................................        $584
Operating expenses..........................................         416
                                                                    ----
Operating income............................................         168
Other expense, net..........................................         108
                                                                    ----
Net Income(b)...............................................        $ 60
                                                                    ====
</Table>

-------------------------
(a)  Revenue from Consumers totaled $514 million in 2003.

(b)  Our share of net income was $29 million for the year ended December 31,
     2003.

     The FMLP is the sole beneficiary of a trust that is the lessor in a
long-term direct finance lease with the MCV Partnership. For the year ended
December 31, 2003, the FMLP recorded earnings of $32 million related to the
direct finance lease.

15: QUARTERLY FINANCIAL AND COMMON STOCK INFORMATION (UNAUDITED)

<Table>
<Caption>
                                                                                  2005
                                                               ------------------------------------------
QUARTERS ENDED                                                 MARCH 31    JUNE 30    SEPT. 30    DEC. 31
--------------                                                 --------    -------    --------    -------
                                                                             (IN MILLIONS)
<S>                                                            <C>         <C>        <C>         <C>
Operating revenue..........................................     $1,632     $1,016      $1,025     $1,559
Operating income (loss)....................................        416         86        (865)        (9)
Net income (loss)..........................................        157         33        (276)       (10)
Preferred stock dividends..................................         --          1          --          1
Net income (loss) available to common stockholder..........        157         32        (276)       (11)
</Table>

                                      CE-84
<PAGE>
                            CONSUMERS ENERGY COMPANY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

<Table>
<Caption>
                                                                                  2004
                                                               ------------------------------------------
QUARTERS ENDED                                                 MARCH 31    JUNE 30    SEPT. 30    DEC. 31
--------------                                                 --------    -------    --------    -------
                                                                             (IN MILLIONS)
<S>                                                            <C>         <C>        <C>         <C>
Operating revenue..........................................     $1,547      $923        $885      $1,356
Operating income...........................................        247       111         122         194
Income before cumulative effect of change in accounting
  principle................................................        105        24          34         117
Cumulative effect of change in accounting(a)...............         (1)       --          --          --
Net income.................................................        104        24          34         117
Preferred stock dividends..................................         --         1          --           1
Net income available to common stockholder.................        104        23          34         116
</Table>

-------------------------
(a)  Net of tax.

                                      CE-85
<PAGE>

            REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholder of Consumers Energy Company

     We have audited the accompanying consolidated balance sheets of Consumers
Energy Company (a Michigan Corporation and wholly-owned subsidiary of CMS Energy
Corporation) as of December 31, 2005 and 2004, and the related consolidated
statements of income (loss), common stockholder's equity, and cash flows for
each of the three years in the period ended December 31, 2005. Our audits also
included the financial statement schedule listed in the Index at Item 15(a)(2).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits. We did not audit the financial
statements of Midland Cogeneration Venture Limited Partnership, a 49% owned
variable interest entity which has been consolidated in 2005 and 2004 and
accounted for under the equity method of accounting in 2003. Those statements
were audited by other auditors whose report has been furnished to us, and our
opinion on the consolidated financial statements, insofar as it relates to the
amounts included for Midland Cogeneration Venture Limited Partnership, is based
solely on the report of the other auditors.

     We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits and the report of other auditors provide a reasonable basis for our
opinion.

     In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Consumers Energy Company at December 31,
2005 and 2004, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 2005, in
conformity with U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.

     As discussed in Note 7 to the consolidated financial statements, in 2005,
the Company adopted Financial Accounting Standards Board (FASB) interpretation
No. 47, "Accounting for Conditional Asset Retirement Obligations". As discussed
in Note 14 to the consolidated financial statements, in 2004, the Company
adopted Revised FASB Interpretation No. 46, "Consolidation of Variable Interest
Entities". In addition, as discussed in Note 6 to the consolidated financial
statements, in 2004, the Company changed its measurement date for all Consumers
Energy Company pension and postretirement benefit plans. As discussed in Note 7
to the consolidated financial statements, in 2003, the Company adopted the
provisions of Statement of Financial Accounting Standards (SFAS) No. 143,
"Accounting for Asset Retirement Obligations".

     We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of
Consumers Energy Company's internal control over financial reporting as of
December 31, 2005, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated February 22, 2006 expressed an unqualified
opinion thereon.

                                          /s/ Ernst & Young LLP

Detroit, Michigan
February 22, 2006

                                      CE-86
<PAGE>

            REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Partners and the Management Committee of
Midland Cogeneration Venture Limited Partnership:

     We have completed integrated audits of Midland Cogeneration Venture Limited
Partnership's 2005 and 2004 consolidated financial statements and of its
internal control over financial reporting as of December 31, 2005 and an audit
of its 2003 consolidated financial statements in accordance with the standards
of the Public Company Accounting Oversight Board (United States). Our opinions,
based on our audits, are presented below.

CONSOLIDATED FINANCIAL STATEMENTS

     In our opinion, the consolidated financial statements listed in the index
appearing under Item 15(a)(1) present fairly, in all material respects, the
financial position of Midland Cogeneration Venture Limited Partnership (a
Michigan Limited Partnership) and its subsidiaries at December 31, 2005 and
2004, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2005 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit of financial statements includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

INTERNAL CONTROL OVER FINANCIAL REPORTING

     Also, in our opinion, management's assessment, included in Management's
Report on Internal Control Over Financial Reporting appearing under Item 9(A),
that the Partnership maintained effective internal control over financial
reporting as of December 31, 2005 based on criteria established in Internal
Control -- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), is fairly stated, in all
material respects, based on those criteria. Furthermore, in our opinion, the
Partnership maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2005, based on criteria established
in Internal Control -- Integrated Framework issued by the COSO. The
Partnership's management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express
opinions on management's assessment and on the effectiveness of the
Partnership's internal control over financial reporting based on our audit. We
conducted our audit of internal control over financial reporting in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. An audit of internal control
over financial reporting includes obtaining an understanding of internal control
over financial reporting, evaluating management's assessment, testing and
evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we consider necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinions.

     A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable
                                      CE-87
<PAGE>

assurance regarding prevention or timely detection of unauthorized acquisition,
use, or disposition of the company's assets that could have a material effect on
the financial statements.

     Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP
Detroit, Michigan
February 20, 2006

                                      CE-88
<PAGE>

             ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
                     ON ACCOUNTING AND FINANCIAL DISCLOSURE

CMS ENERGY

     None.

CONSUMERS

     None.

                 ITEM 9A. CMS ENERGY'S CONTROLS AND PROCEDURES

     EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES: Under the supervision and
with the participation of management, including its CEO and CFO, CMS Energy
conducted an evaluation of its disclosure controls and procedures (as such term
is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). As
described below, under Management's Report on Internal Control Over Financial
Reporting, CMS Energy has identified a material weakness in its internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for income taxes. CMS Energy's CEO and CFO concluded that as a result
of the material weakness, its disclosure controls and procedures were not
effective as of December 31, 2005 and would not have been effective as of
December 31, 2004.

     To address the control weakness described below, CMS Energy performed
additional analysis and other post closing procedures in order to prepare its
consolidated financial statements in accordance with generally accepted
accounting principles in the United States of America. Accordingly, management
believes that the consolidated financial statements for all periods presented in
this 2005 Form 10-K fairly present, in all material respects, CMS Energy's
financial condition, results of operations, and cash flows.

     MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING: CMS
Energy's management is responsible for establishing and maintaining adequate
internal control over financial reporting, as defined in Exchange Act Rule
13a-15(f). CMS Energy's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles in the United States of
America and includes policies and procedures that:

     - pertain to the maintenance of records that in reasonable detail,
       accurately and fairly reflect the transactions and dispositions of the
       assets of CMS Energy;

     - provide reasonable assurance that transactions are recorded as necessary
       to permit preparation of financial statements in accordance with
       generally accepted accounting principles in the United States of America,
       and that receipts and expenditures of CMS Energy are being made only in
       accordance with authorizations of management and directors of CMS Energy;
       and

     - provide reasonable assurance regarding prevention or timely detection of
       unauthorized acquisition, use or disposition of CMS Energy's assets that
       could have a material effect on its financial statements.

     Management, including its CEO and CFO, does not expect that its internal
controls will prevent or detect all errors and all fraud. A control system, no
matter how well designed and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further,
the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. In addition, any evaluation of the effectiveness of controls is subject
to risks that those internal controls may become inadequate in future periods
because of changes in business conditions, or that the degree of compliance with
the policies or procedures deteriorates.

     Under the supervision and with the participation of management, including
its CEO and CFO, CMS Energy conducted an evaluation of the effectiveness of its
internal control over financial reporting as of December 31, 2005. In making
this evaluation, management used the criteria set forth in the framework in
Internal Control --

                                       CO-1
<PAGE>

Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on such evaluation, CMS Energy's management concluded
that its internal control over financial reporting was not effective as of
December 31, 2005 as a result of a material weakness in internal controls
surrounding the accounting for income taxes.

     A material weakness is a significant deficiency (within the meaning of
Public Company Accounting Oversight Board Auditing Standard No. 2), or
combination of significant deficiencies, that results in there being a more than
remote likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected.

     CMS Energy, in connection with the execution of enhanced control processes
which reconciled all deferred tax accounts to filed tax returns in the fourth
quarter of 2005, determined that certain material errors existed in the deferred
tax liability and tax reserve accounts prior to their correction in the 2005
consolidated financial statements. The principal factors contributing to the
material weakness at December 31, 2005 in accounting for income taxes were lack
of effective controls over the reconciliation of, and adjustments to, CMS
Energy's deferred tax asset, deferred tax liability, and tax reserve accounts.
CMS Energy did not execute appropriate deferred tax asset and liability account
reconciliation procedures at a detailed account level and lacked sufficient
review and approval practices within the tax and finance organizations resulting
in the errors not being prevented or detected in a timely manner. In addition,
CMS Energy did not timely identify required adjustments to its tax reserve
account.

     CMS Energy's management's assessment of the effectiveness of CMS Energy's
internal control over financial reporting as of December 31, 2005 has been
audited by Ernst & Young LLP, an independent registered public accounting firm,
which audited the consolidated financial statements of CMS Energy included in
this Form 10-K. Ernst & Young LLP's attestation report on CMS Energy's
management's assessment of internal control over financial reporting is provided
elsewhere in this Item 9A.

     Material Weakness Remediation Plans as of Date of Filing this Form 10-K:
Management believes it has taken steps necessary to remediate this material
weakness relating to income taxes; however, all processes and procedures and
controls were not in place for an adequate period of time to conclude that they
were operating effectively as of December 31, 2005. Accordingly, management will
continue to monitor the effectiveness of these processes and procedures and will
make any changes management determines appropriate. Summarized below are some of
the key processes and procedures:

     - Adopting a more rigorous approach to communicate, document and reconcile
       the detailed components of deferred income tax assets and liabilities;

     - Expanding staffing and resources, along with providing training related
       to the income tax accounting function throughout CMS Energy;

     - Implementing additional procedures for tax and accounting personnel
       related to tax reserve adjustments and in tracking movements in deferred
       tax accounts recorded by CMS Energy and its subsidiaries; and

     - Recording all tax accounting adjustments on each respective subsidiary's
       books for ongoing tracking, reconciliation and translation, where
       appropriate.

     As noted above, as a result of performing additional analysis and other
post-closing procedures, management believes that the consolidated financial
statements included in this 2005 Form 10-K fairly present, in all material
respects, CMS Energy's financial condition, results of operations and cash flows
for the periods presented.

     CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING: Except as otherwise
discussed herein, there have been no changes in CMS Energy's internal control
over financial reporting during the most recently completed fiscal quarter that
have materially affected, or are reasonably likely to materially affect, its
internal control over financial reporting.

                                       CO-2
<PAGE>

            REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of CMS Energy Corporation

     We have audited management's assessment, included in the accompanying
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING, that CMS
Energy Corporation (a Michigan Corporation) did not maintain effective internal
control over financial reporting as of December 31, 2005, because of the effect
of the Company's insufficient controls surrounding the accounting for income
taxes, based on criteria established in Internal Control -- Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria). CMS Energy Corporation's management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the company's internal control over financial
reporting based on our audit. We did not examine the effectiveness of internal
control over financial reporting of Midland Cogeneration Venture Limited
Partnership, a 49% owned variable interest entity, whose financial statements
reflect total assets and revenues constituting 8% and 9%, respectively, of the
related consolidated financial statement amounts as of and for the year ended
December 31, 2005. The effectiveness of Midland Cogeneration Venture Limited
Partnership's internal control over financial reporting was audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to the effectiveness of Midland Cogeneration Venture Limited
Partnership's internal control over financial reporting, is based solely on the
report of the other auditors.

     We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit and the report of the other auditors
provide a reasonable basis for our opinion.

     A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.

     Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.

     A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. The following material weakness has been identified and included in
management's assessment. CMS Energy Corporation (the Company) did not maintain
effective controls over the accounting for income taxes, including deferred
income tax assets and liabilities, tax reserves, and the related income tax
provision and disclosures. Specifically, the Company identified the following:
lack of effective controls over the reconciliation of its deferred tax asset and
deferred tax liability accounts including insufficient or ineffective review and
approval practices within the tax and finance organizations resulting in errors
not being prevented or detected in a timely manner and lack of timely
identification of required adjustments to tax reserve accounts. This material
weakness could result in a misstatement of deferred tax assets and liabilities,
tax reserves and the related

                                       CO-3
<PAGE>

income tax provision and disclosures that could result in a material
misstatement to annual or interim consolidated financial statements. This
material weakness was considered in determining the nature, timing, and extent
of audit tests applied in our audit of the 2005 financial statements, and this
report does not affect our report dated February 22, 2006 on those financial
statements.

     In our opinion, based on our audit and the report of the other auditors,
management's assessment that CMS Energy Corporation did not maintain effective
internal control over financial reporting as of December 31, 2005, is fairly
stated, in all material respects, based on the COSO criteria. Also, in our
opinion, based on our audit and the report of the other auditors, because of the
effect of the material weakness described above on the achievement of the
objectives of the control criteria, CMS Energy Corporation has not maintained
effective internal control over financial reporting as of December 31, 2005,
based on the COSO criteria.

                                          /s/ Ernst & Young LLP

Detroit, Michigan
February 22, 2006

                                       CO-4
<PAGE>

MCV MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management's Report on Internal Control Over Financial Reporting

     MCV's management is responsible for establishing and maintaining an
adequate system of internal control over financial reporting of MCV. This system
is designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with accounting principles generally accepted in the
United States of America.

     MCV's internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of MCV; (ii) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
MCV are being made only in accordance with authorizations of management and the
Management Committee of MCV; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of MCV's assets that could have a material effect on the financial statements.

     Because of its inherent limitations, a system of internal control over
financial reporting can provide only reasonable assurance and may not prevent or
detect misstatements. Further, because of changes in conditions, effectiveness
of internal controls over financial reporting may vary over time.

     MCV management conducted an evaluation of the effectiveness of the system
of internal control over financial reporting based on the framework in "Internal
Control -- Integrated Framework" issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this evaluation, management
concluded that MCV's system of internal control over financial reporting was
effective as of December 31, 2005. MCV management's assessment of the
effectiveness of MCV's internal control over financial reporting has been
audited by PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their report which is included at page CMS-108.

                                       CO-5
<PAGE>

                  ITEM 9A. CONSUMERS' CONTROLS AND PROCEDURES

     CONCLUSION REGARDING THE EFFECTIVENESS OF DISCLOSURE CONTROLS AND
PROCEDURES: Under the supervision and with the participation of management,
including its CEO and CFO, Consumers conducted an evaluation of its disclosure
controls and procedures (as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act). Based on such evaluation, Consumers' CEO and
CFO have concluded that its disclosure controls and procedures are effective as
of the end of the period covered by this annual report.

     MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING:
Consumers' management is responsible for establishing and maintaining adequate
internal control over financial reporting, as defined in Rule 13a-15(f) under
the Exchange Act. Under the supervision and with the participation of
management, including its CEO and CFO, Consumers conducted an evaluation of the
effectiveness of its internal control over financial reporting based on the
framework in Internal Control -- Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on such evaluation,
Consumers' management concluded that its internal control over financial
reporting was effective as of December 31, 2005.

     Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.

     Consumers' management's assessment of the effectiveness of Consumers'
internal control over financial reporting as of December 31, 2005 has been
audited by Ernst & Young LLP, an independent registered public accounting firm,
which audited the consolidated financial statements of Consumers included in
this Form 10-K. Ernst & Young LLP's attestation report on Consumers'
management's assessment of internal control over financial reporting is provided
elsewhere in this Item 9A.

                                       CO-6
<PAGE>

            REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholder of Consumers Energy Company

     We have audited management's assessment, included in the accompanying
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING, that Consumers
Energy Company (a Michigan Corporation and wholly-owned subsidiary of CMS Energy
Corporation) maintained effective internal control over financial reporting as
of December 31, 2005, based on criteria established in Internal
Control -- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). Consumers Energy
Company's management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the company's
internal control over financial reporting based on our audit. We did not examine
the effectiveness of internal control over financial reporting of Midland
Cogeneration Venture Limited Partnership, a 49% owned variable interest entity,
whose financial statements reflect total assets and revenues constituting 10%
and 11%, respectively, of the related consolidated financial statement amounts
as of and for the year ended December 31, 2005. The effectiveness of Midland
Cogeneration Venture Limited Partnership's internal control over financial
reporting was audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to the effectiveness of Midland
Cogeneration Venture Limited Partnership's internal control over financial
reporting, is based solely on the report of the other auditors.

     We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit and the report of the other auditors
provide a reasonable basis for our opinion.

     A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.

     Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.

     In our opinion, based on our audit and the report of the other auditors,
management's assessment that Consumers Energy Company maintained effective
internal control over financial reporting as of December 31, 2005, is fairly
stated, in all material respects, based on the COSO criteria. Also, in our
opinion, based on our audit and the report of the other auditors, Consumers
Energy Company maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2005, based on the COSO criteria.

                                       CO-7
<PAGE>

     We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheets of Consumers Energy Company as of December 31, 2005 and 2004, and the
related consolidated statements of income (loss), common stockholder's equity,
and cash flows for each of the three years in the period ended December 31, 2005
of Consumers Energy Company and our report dated February 22, 2006 expressed an
unqualified opinion thereon.

                                          /s/ Ernst & Young LLP

Detroit, Michigan
February 22, 2006

                                       CO-8
<PAGE>

MCV MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING:

Management's Report on Internal Control Over Financial Reporting

     MCV's management is responsible for establishing and maintaining an
adequate system of internal control over financial reporting of MCV. This system
is designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with accounting principles generally accepted in the
United States of America.

     MCV's internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of MCV; (ii) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
MCV are being made only in accordance with authorizations of management and the
Management Committee of MCV; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of MCV's assets that could have a material effect on the financial statements.

     Because of its inherent limitations, a system of internal control over
financial reporting can provide only reasonable assurance and may not prevent or
detect misstatements. Further, because of changes in conditions, effectiveness
of internal controls over financial reporting may vary over time.

     MCV management conducted an evaluation of the effectiveness of the system
of internal control over financial reporting based on the framework in "Internal
Control -- Integrated Framework" issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this evaluation, management
concluded that MCV's system of internal control over financial reporting was
effective as of December 31, 2005. MCV management's assessment of the
effectiveness of MCV's internal control over financial reporting has been
audited by PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their report which is included at page CE-87.

                                       CO-9
<PAGE>

                           ITEM 9B. OTHER INFORMATION

CMS ENERGY

     None.

CONSUMERS

     None.

                                      CO-10
<PAGE>

                                    PART III

                   ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS

CMS ENERGY

     Information that is required in Item 10 regarding directors and executive
officers is included in CMS Energy's definitive proxy statement, which is
incorporated by reference herein.

CONSUMERS

     Information that is required in Item 10 regarding Consumers' directors and
executive officers is included in CMS Energy's definitive proxy statement, which
is incorporated by reference herein.

                        ITEM 11. EXECUTIVE COMPENSATION

CMS ENERGY

     Information that is required in Item 11 regarding executive compensation of
CMS Energy's and Consumers' executive officers is included in CMS Energy's
definitive proxy statement, which is incorporated by reference herein.

     The following disclosure describes 2006 compensation issues for executive
officers, directors and employees.

ANNUAL EMPLOYEE INCENTIVE PLANS

     On February 24, 2006, the Compensation and Human Resources Committees (the
"C&HR Committees") of the Boards of Directors of CMS Energy and Consumers (the
"Boards") approved the payout of cash bonuses under the 2005 Annual Employee
Incentive Plan as well as the material terms of the 2006 Annual Employee
Incentive Plan (collectively the "Plans"), including the corporate performance
goals thereunder. The Plans share the material terms detailed below, although
the specific target levels for the corporate performance goals vary from year to
year.

     CORPORATE PERFORMANCE GOALS: The composite plan performance factor will
depend on corporate performance in two areas: (1) the ongoing net income per
outstanding CMS Energy common share ("Plan EPS"); and (2) the corporate free
cash flow of CMS Energy ("CFCF"). Plan EPS performance shall constitute
one-third of the composite plan performance factor and CFCF performance shall
constitute the remaining two-thirds of the composite plan performance factor.
There will be a payout under the Plans if either a Plan EPS performance factor
of at least 95 percent of the target Plan EPS or a CFCF performance factor of at
least 83.3 percent of the target CFCF is achieved. If one but not both of these
target minimums is achieved, a partial payout would result. The composite plan
performance factor to be used for payouts will be capped at a maximum of 200
percent.

     ANNUAL AWARD FORMULA: Annual awards for each eligible officer will be based
upon a standard award percentage of the officer's base salary as in effect on
January 1 of the performance year. The maximum amount that can be awarded under
the Plans for any Internal Revenue Code Section 162(m) employee will not exceed
$2.5 million in any one performance year. Annual awards for officers will be
calculated and made as follows: Individual Award = Base Salary times Standard
Award % times Performance Factor %.

     The standard award percentages for officers and the annual awards formula
for middle management and other employees are based on individual salary grade
levels and remain unchanged from the 2005 plan.

     PAYMENT OF ANNUAL AWARDS: All annual awards for a performance year will be
paid in cash no later than March 31st of the calendar year following the
performance year provided that they first have been reviewed and approved by the
C&HR Committees, and provided further that the annual award for a particular
performance year has not been deferred voluntarily. The amounts required by law
to be withheld for income and employment taxes will be deducted from the annual
award payments. All annual awards become the obligation of the company on whose
payroll the employee is enrolled at the time the C&HR Committees make the annual
award.

                                      CO-11
<PAGE>

COMPENSATION OF DIRECTORS

     In connection with the January 26, 2006 meetings of the Boards and the
Governance and Public Responsibility Committees (the "G&PR Committees") thereof,
the 2006 compensation of the outside members of the Boards and Board committees
was confirmed. Directors who are not CMS Energy or Consumers employees receive
an annual retainer fee of $30,000, $1,500 for attendance at each Board meeting,
$750 per meeting for special telephonic meetings of the Boards and $1,500 for
attendance at each committee meeting. The Chair of the Audit Committees receives
an annual retainer fee of $7,500 and each other Audit Committee member receives
an annual retainer fee of $2,000. The Chairs of the C&HR Committees, Finance and
Pension Committees, and the G&PR Committees each receive an annual retainer fee
of $5,000. The non-executive Chairman of the Boards (the "Chairman") receives
the various elements of the regular non-employee director compensation program
as well as an additional annual cash retainer fee of $120,000. The Chairman does
not, however, serve on any of the standing committees of the Boards, other than
the Executive Committees, and thus does not receive the committee meeting fees
or retainers described above.

     In 2006, the annual restricted stock award for the non-employee directors
will have a fair market value of $45,000 at the time of the May grant. These
restricted shares must be held for at least three years from the date of the
grant. The Boards have adopted stock ownership guidelines that will align
further the interests of the directors with the shareholders. Board members are
required to hold CMS Energy common stock equivalent in value to five times their
annual cash retainer within five years of becoming a director.

     Directors are reimbursed for expenses incurred in attending Board or
committee meetings and other company business. Directors who are CMS Energy or
Consumers employees do not receive retainers or meeting fees for service on the
Boards or as a member of any Board committee. Non-employee directors receive a
single retainer fee and restricted share award for service on the Boards and
each of their committees, as well as a single meeting attendance fee for
concurrent meetings of the Boards or committees.

          ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                     MANAGEMENT RELATED STOCKHOLDER MATTERS

CMS ENERGY

     Information that is required in Item 12 regarding securities authorized for
issuance under equity compensation plans and security ownership of certain
beneficial owners and management is included in CMS Energy's definitive proxy
statement, which is incorporated by reference herein.

CONSUMERS

     Information that is required in Item 12 regarding securities authorized for
issuance under equity compensation plans and security ownership of certain
beneficial owners and management of Consumers is included in CMS Energy's
definitive proxy statement, which is incorporated by reference herein.

            ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

CMS ENERGY

     Information that is required in Item 13 regarding certain relationships and
related transactions is included in CMS Energy's definitive proxy statement,
which is incorporated by reference herein.

CONSUMERS

     Information that is required in Item 13 regarding certain relationships and
related transactions regarding Consumers is included in CMS Energy's definitive
proxy statement, which is incorporated by reference herein.

                                      CO-12
<PAGE>

                ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

CMS ENERGY

     Information that is required in Item 14 regarding principal accountant fees
and services is included in CMS Energy's definitive proxy statement, which is
incorporated by reference herein.

CONSUMERS

     Information that is required in Item 14 regarding principal accountant fees
and services relating to Consumers is included in CMS Energy's definitive proxy
statement, which is incorporated by reference herein.

                                    PART IV

              ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)(1)      Financial Statements and Reports of Independent Public Accountants
            for CMS Energy and Consumers are included in each company's ITEM 8.
            FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA and are incorporated by
            reference herein.

(a)(2)      Index to Financial Statement Schedules.

<Table>
<Caption>
                                                                             PAGE
                                                                            -------
<S>          <C>                                                            <C>
Schedule II  Valuation and Qualifying Accounts and Reserves
                 CMS Energy Corporation..................................   CO-19
                 Consumers Energy Company................................   CO-20
Report of Independent Registered Public Accounting Firm
                 CMS Energy Corporation..................................   CMS-107
                 Consumers Energy Company................................   CE-86
</Table>

     Schedules other than those listed above are omitted because they are either
not required, not applicable or the required information is shown in the
financial statements or notes thereto. Columns omitted from schedules filed have
been omitted because the information is not applicable.

(a)(3)      Exhibits for CMS Energy and Consumers are listed after Item 15(b)
            below and are incorporated by reference herein.

(b)         Exhibits, including those incorporated by reference (see also
            Exhibit volume).

                                      CO-13
<PAGE>

                      CMS ENERGY'S AND CONSUMERS' EXHIBITS

<Table>
<Caption>
                 PREVIOUSLY FILED
            --------------------------
            WITH FILE      AS EXHIBIT
EXHIBITS      NUMBER         NUMBER                                    DESCRIPTION
--------    ---------      ----------                                  -----------
<S>         <C>           <C>           <C>     <C>
(3)(a)      1-9513        (99)(a)       --      Restated Articles of Incorporation of CMS Energy (Form
                                                8-K filed June 3, 2004)
(3)(b)      1-9513        (3)(a)        --      Bylaws of CMS Energy (Form 8-K filed October 6, 2004)
(3)(c)      1-5611        3(c)          --      Restated Articles of Incorporation dated May 26, 2000, of
                                                Consumers (2000 Form 10-K)
(3)(d)      1-5611        (3)(b)        --      Bylaws of Consumers (Form 8-K filed October 6, 2004)
(4)(a)      2-65973       (b)(1)-4      --      Indenture dated as of September 1, 1945, between
                                                Consumers and Chemical Bank (successor to Manufacturers
                                                Hanover Trust Company), as Trustee, including therein
                                                indentures supplemental thereto through the Forty-third
                                                Supplemental Indenture dated as of May 1, 1979
                                        --      Indentures Supplemental thereto:
            1-5611        (4)(a)        --      70th dated as of 2/01/98 (1997 Form 10-K)
            1-5611        (4)(a)        --      71st dated as of 3/06/98 (1997 Form 10-K)
            1-5611        (4)(b)        --      75th dated as of 10/1/99 (1999 Form 10-K)
            1-5611        (4)(d)        --      77th dated as of 10/1/99 (1999 Form 10-K)
            1-5611        (4)(d)        --      90th dated as of 4/30/03 (1st qtr. 2003 Form 10-Q)
            1-5611        (4)(a)        --      91st dated as of 5/23/03 (3rd qtr. 2003 Form 10-Q)
            1-5611        (4)(b)        --      92nd dated as of 8/26/03 (3rd qtr. 2003 Form 10-Q)
            333-111220    (4)(a)(i)     --      94th dated as of 11/7/03 (Consumers Form S-4 dated
                                                December 16, 2003)
            1-5611        (4)(a)        --      96th dated as of 8/17/04 (Form 8-K filed August 20, 2004)
            333-120611    (4)(e)(xv)    --      97th dated as of 9/1/04 (Consumers Form S-3 dated
                                                November 18, 2004)
            1-5611        4.4           --      98th dated as of 12/13/04 (Form 8-K filed December 13,
                                                2004)
            1-5611        (4)(a)(i)     --      99th dated as of 1/20/05 (2004 Form 10-K)
            1-5611        4.2           --      100th dated as of 3/24/05 (Form 8-K filed March 30, 2005)
            1-5611        (4)(a)        --      101st dated as of 4/1/05 (1st qtr 2005 Form 10-Q)
            1-5611        4.2           --      102nd dated as of 4/13/05 (Form 8-K filed April 13, 2005)
            1-5611        4.2           --      104th dated as of 8/11/05 (Form 8-K filed August 11,
                                                2005)
(4)(b)      1-5611        (4)(b)        --      Indenture dated as of January 1, 1996 between Consumers
                                                and The Bank of New York, as Trustee (1995 Form 10-K)
                                        --      Indentures Supplemental thereto:
            1-5611        (4)(b)(i)     --      4th dated as of 5/31/01 (2004 Form 10-K)
(4)(c)      1-5611        (4)(c)        --      Indenture dated as of February 1, 1998 between Consumers
                                                and JPMorgan Chase Bank, N.A. (formerly The Chase
                                                Manhattan Bank), as Trustee (1997 Form 10-K)
(4)(d)      33-47629      (4)(a)        --      Indenture dated as of September 15, 1992 between CMS
                                                Energy and NBD Bank, as Trustee (Form S-3 filed May 1,
                                                1992)
                                        --      Indentures Supplemental thereto:
            1-9513        (4)(d)(i)     --      7th dated as of 1/25/99 (1998 Form 10-K)
            333-48276     (4)           --      10th dated as of 10/12/00 (Form S-3 filed October 19,
                                                2000)
            333-58686     (4)(a)        --      11th dated as of 3/29/01 (Form S-8 filed April 11, 2001)
            333-51932     (4)(a)        --      12th dated as of 7/02/01 (Form POS AM filed August 3,
                                                2001)
            1-9513        (4)(d)(i)     --      15th dated as of 9/29/04 (2004 Form 10-K)
            1-9513        (4)(d)(ii)    --      16th dated as of 12/16/04 (2004 Form 10-K)
            1-9513        4.2           --      17th dated as of 12/13/04 (Form 8-K filed December 13,
                                                2004)
            1-9513        4.2           --      18th dated as of 1/19/05 (Form 8-K filed January 20,
                                                2005)
</Table>

                                      CO-14
<PAGE>

<Table>
<Caption>
                 PREVIOUSLY FILED
            --------------------------
            WITH FILE      AS EXHIBIT
EXHIBITS      NUMBER         NUMBER                                    DESCRIPTION
--------    ---------      ----------                                  -----------
<S>         <C>           <C>           <C>     <C>
            1-9513        4.2           --      19th dated as of 12/13/05 (Form 8-K filed December 15,
                                                2005)
(4)(e)      1-9513        (4a)          --      Indenture dated as of June 1, 1997, between CMS Energy
                                                and The Bank of New York, as trustee (Form 8-K filed July
                                                1, 1997)
                                        --      Indentures Supplemental thereto:
            1-9513        (4)(b)        --      1st dated as of 6/20/97 (Form 8-K filed July 1, 1997)
(4)(f)      1-9513        (4)(i)        --      Certificate of Designation of 4.50% Cumulative
                                                Convertible Preferred Stock dated as of December 2, 2003
                                                (2003 Form 10-K)
(10)(a)     333-125553    (4)(j)        --      $300 million Sixth Amended and Restated Credit Agreement
                                                dated as of May 18, 2005 among CMS Energy, Enterprises,
                                                the Banks, and the Administrative Agent and Collateral
                                                Agent, all defined therein (Form S-3 filed June 6, 2005)
(10)(b)     333-125553    (4)(k)        --      Reaffirmation of grant of a security interest dated as of
                                                May 18, 2005 among CMS Energy, CMS Enterprises, and the
                                                Administrative Agent and Collateral Agent, as defined
                                                therein (Form S-3 filed June 6, 2005)
(10)(c)     1-9513        (4)(l)        --      Cash Collateral Agreement dated as of August 3, 2004 made
                                                by CMS Energy to the Administrative Agent for the lenders
                                                and Collateral Agent, as defined therein (2004 Form 10-K)
(10)(d)     1-5611        (4)(b)        --      $500 million Third Amended and Restated Credit Agreement
                                                dated as of May 18, 2005 among Consumers, the Banks, the
                                                Administrative Agent, the Syndication Agent and the
                                                Co-Documentation Agents, all as defined therein (2nd qtr
                                                2005 Form 10-Q)
(10)(e)                                 --      103rd Supplemental Indenture to the Indenture dated as of
                                                September 1, 1945 between Consumers and Chemical Bank
                                                (successor to Manufacturers Hanover Trust Company), as
                                                Trustee
(10)(f)     1-9513        (10)(b)       --      Form of Employment Agreement entered into by CMS Energy's
                                                and Consumers' executive officers (1999 Form 10-K)
(10)(g)     1-5611        (10)(g)       --      Consumers' Executive Stock Option and Stock Appreciation
                                                Rights Plan effective December 1, 1989 (1990 Form 10-K)
(10)(h)     1-9513        (10)(d)       --      CMS Energy's Performance Incentive Stock Plan effective
                                                February 3, 1988, as amended December 3, 1999 (1999 Form
                                                10-K)
(10)(i)     1-9513        (10)(g)       --      CMS Energy's Salaried Employees Merit Program for 2003
                                                effective January 1, 2003 (2003 Form 10-K)
(10)(j)     1-9513        (10)(m)       --      CMS Deferred Salary Savings Plan effective January 1,
                                                1994 (1993 Form 10-K)
(10)(k)     1-9513        (10)(a)       --      Annual Officer Incentive Compensation Plan for CMS Energy
                                                Corporation and its Subsidiaries effective January 1,
                                                2005 (1st qtr 2005 Form 10-Q)
(10)(l)     1-9513        (10)(b)       --      Annual Management Incentive Compensation Plan for CMS
                                                Energy Corporation and its Subsidiaries effective January
                                                1, 2004 (1st qtr 2005 10-Q)
(10)(m)     1-9513        (10)(c)       --      Annual Employee Incentive Compensation Plan for CMS
                                                Energy Corporation and its Subsidiaries effective January
                                                1, 2005 (1st qtr 2005 10-Q)
(10)(n)     1-9513        (10)(h)       --      Supplemental Executive Retirement Plan for Employees of
                                                CMS Energy/Consumers Energy Company effective January 1,
                                                1982, as amended December 3, 1999 (1999 Form 10-K)
</Table>

                                      CO-15
<PAGE>

<Table>
<Caption>
                 PREVIOUSLY FILED
            --------------------------
            WITH FILE      AS EXHIBIT
EXHIBITS      NUMBER         NUMBER                                    DESCRIPTION
--------    ---------      ----------                                  -----------
<S>         <C>           <C>           <C>     <C>
(10)(o)     33-37977      4.1           --      Senior Trust Indenture, Leasehold Mortgage and Security
                                                Agreement dated as of June 1, 1990 between The
                                                Connecticut National Bank and United States Trust Company
                                                of New York (MCV Partnership)
                                                Indenture Supplemental thereto:
            33-37977      4.2           --      Supplement No. 1 dated as of June 1, 1990 (MCV
                                                Partnership)
(10)(p)     1-9513        (28)(b)       --      Collateral Trust Indenture dated as of June 1, 1990 among
                                                Midland Funding Corporation I, MCV Partnership and United
                                                States Trust Company of New York, Trustee (3rd qtr 1990
                                                Form 10-Q) Indenture Supplemental thereto:
            33-37977      4.4           --      Supplement No. 1 dated as of June 1, 1990 (MCV
                                                Partnership)
(10)(q)     1-9513        (10)(v)       --      Amended and Restated Investor Partner Tax Indemnification
                                                Agreement dated as of June 1, 1990 among Investor
                                                Partners, CMS Midland as Indemnitor and CMS Energy as
                                                Guarantor (1990 Form 10-K)
(10)(r)     1-9513        (19)(d)*      --      Environmental Agreement dated as of June 1, 1990 made by
                                                CMS Energy to The Connecticut National Bank and Others
                                                (1990 Form 10-K)
(10)(s)     1-9513        (10)(z)*      --      Indemnity Agreement dated as of June 1, 1990 made by CMS
                                                Energy to Midland Cogeneration Venture Limited
                                                Partnership (1990 Form 10-K)
(10)(t)     1-9513        (10)(aa)*     --      Environmental Agreement dated as of June 1, 1990 made by
                                                CMS Energy to United States Trust Company of New York,
                                                Meridian Trust Company, each Subordinated Collateral
                                                Trust Trustee and Holders from time to time of Senior
                                                Bonds and Subordinated Bonds and Participants from time
                                                to time in Senior Bonds and Subordinated Bonds (1990 Form
                                                10-K)
(10)(u)     33-37977      10.4          --      Amended and Restated Participation Agreement dated as of
                                                June 1, 1990 among MCV Partnership, Owner Participant,
                                                The Connecticut National Bank, United States Trust
                                                Company, Meridian Trust Company, Midland Funding
                                                Corporation I, Midland Funding Corporation II, MEC
                                                Development Corporation and Institutional Senior Bond
                                                Purchasers (MCV Partnership)
(10)(v)     33-3797       10.4          --      Power Purchase Agreement dated as of July 17, 1986
                                                between MCV Partnership and Consumers (MCV Partnership)
                                                Amendments thereto:
            33-37977      10.5          --      Amendment No. 1 dated September 10, 1987 (MCV
                                                Partnership)
            33-37977      10.6          --      Amendment No. 2 dated March 18, 1988 (MCV Partnership)
            33-37977      10.7          --      Amendment No. 3 dated August 28, 1989 (MCV Partnership)
            33-37977      10.8          --      Amendment No. 4A dated May 25, 1989 (MCV Partnership)
(10)(w)     1-5611        (10)(y)       --      Unwind Agreement dated as of December 10, 1991 by and
                                                among CMS Energy, Midland Group, Ltd., Consumers, CMS
                                                Midland, Inc., MEC Development Corp. and CMS Midland
                                                Holdings Company (1991 Form 10-K)
(10)(x)     1-5611        (10)(z)       --      Stipulated AGE Release Amount Payment Agreement dated as
                                                of June 1, 1990, among CMS Energy, Consumers and The Dow
                                                Chemical Company (1991 Form 10-K)
</Table>

                                      CO-16
<PAGE>

<Table>
<Caption>
                 PREVIOUSLY FILED
            --------------------------
            WITH FILE      AS EXHIBIT
EXHIBITS      NUMBER         NUMBER                                    DESCRIPTION
--------    ---------      ----------                                  -----------
<S>         <C>           <C>           <C>     <C>
(10)(y)     1-5611        (10)(aa)*     --      Parent Guaranty dated as of June 14, 1990 from CMS Energy
                                                to MCV, each of the Owner Trustees, the Indenture
                                                Trustees, the Owner Participants and the Initial
                                                Purchasers of Senior Bonds in the MCV Sale Leaseback
                                                transaction, and MEC Development (1991 Form 10-K)
(10)(z)     1-8157        10.41         --      Contract for Firm Transportation of Natural Gas between
                                                Consumers Power Company and Trunkline Gas Company, dated
                                                November 1, 1989, and Amendment, dated November 1, 1989
                                                (1989 Form 10-K of PanEnergy Corp.)
(10)(aa)    1-8157        10.41         --      Contract for Firm Transportation of Natural Gas between
                                                Consumers Power Company and Trunkline Gas Company, dated
                                                November 1, 1989 (1991 Form 10-K of PanEnergy Corp.)
(10)(bb)    1-2921        10.03         --      Contract for Firm Transportation of Natural Gas between
                                                Consumers Power Company and Trunkline Gas Company, dated
                                                September 1, 1993 (1993 Form 10-K)
(10)(cc)    1-5611        10            --      First Amended and Restated Employment Agreement between
                                                Kenneth Whipple and CMS Energy Corporation effective as
                                                of September 1, 2003 (8-K dated October 24, 2003)
(10)(dd)    1-9513        (10)(a)       --      Acknowledgement of Resignation between Tamela W. Pallas
                                                and CMS Energy Corporation (2nd qtr 2002 Form 10-Q)
(10)(ee)    1-9513        (10)(b)       --      Employment, Separation and General Release Agreement
                                                between William T. McCormick, Jr. and CMS Energy
                                                Corporation (2nd qtr 2002 Form 10-Q)
(10)(ff)    1-9513        (10)(c)       --      Resignation and General Release Agreement between Alan M.
                                                Wright and CMS Energy Corporation (2nd qtr 2002 Form
                                                10-Q)
(12)(a)                                 --      Statement regarding computation of CMS Energy's Ratio of
                                                Earnings to Fixed Charges and Preferred Dividends
(12)(b)                                 --      Statement regarding computation of Consumers' Ratio of
                                                Earnings to Fixed Charges and Preferred Dividends and
                                                Distributions
(21)                                    --      Subsidiaries of CMS Energy and Consumers
(23)(a)                                 --      Consent of Ernst & Young LLP for CMS Energy
(23)(b)                                 --      Consent of PricewaterhouseCoopers LLP for CMS Energy re:
                                                MCV
(23)(c)                                 --      Consent of Ernst & Young for CMS Energy re: Jorf Lasfar
(23)(d)                                 --      Consent of Price Waterhouse for CMS Energy re: Jorf
                                                Lasfar
(23)(e)                                 --      Consent of Ernst & Young LLP for Consumers
(23)(f)                                 --      Consent of PricewaterhouseCoopers LLP for Consumers re:
                                                MCV
(24)(a)                                 --      Power of Attorney for CMS Energy
(24)(b)                                 --      Power of Attorney for Consumers
(31)(a)                                 --      CMS Energy's certification of the CEO pursuant to Section
                                                302 of the Sarbanes-Oxley Act of 2002
(31)(b)                                 --      CMS Energy's certification of the CFO pursuant to Section
                                                302 of the Sarbanes-Oxley Act of 2002
(31)(c)                                 --      Consumers' certification of the CEO pursuant to Section
                                                302 of the Sarbanes-Oxley Act of 2002
(31)(d)                                 --      Consumers' certification of the CFO pursuant to Section
                                                302 of the Sarbanes-Oxley Act of 2002
(32)(a)                                 --      CMS Energy's certifications pursuant to Section 906 of
                                                the Sarbanes-Oxley Act of 2002
(32)(b)                                 --      Consumers' certifications pursuant to Section 906 of the
                                                Sarbanes-Oxley Act of 2002
</Table>

                                      CO-17
<PAGE>

<Table>
<Caption>
                 PREVIOUSLY FILED
            --------------------------
            WITH FILE      AS EXHIBIT
EXHIBITS      NUMBER         NUMBER                                    DESCRIPTION
--------    ---------      ----------                                  -----------
<S>         <C>           <C>           <C>     <C>
(99)(a)                                 --      Financial Statements for Midland Cogeneration Venture
                                                Limited Partnership for the years ended December 31,
                                                2001, 2002 and 2003
(99)(b)                                 --      Financial Statements for Jorf Lasfar for the years ended
                                                December 31, 2003, 2004, and 2005
(99)(c)                                 --      Representation regarding Emirates CMS Power Company PJSC
                                                Financial Statements for the years ended December 31,
                                                2003, 2004 and 2005
(99)(d)                                 --      Representation regarding SCP Investments(1) PTY. LTD.
                                                Financial Statements for the years ended June 30, 2002,
                                                2003 and 2004
(99)(e)                                 --      Representation regarding SCP Investments(1) PTY. LTD.
                                                Financial Statements for the period from July 1, 2004 to
                                                August 17, 2004
</Table>

-------------------------
* Obligations of only CMS Holdings and CMS Midland, second tier subsidiaries of
  Consumers, and of CMS Energy but not of Consumers.

     Exhibits listed above that have heretofore been filed with the Securities
and Exchange Commission pursuant to various acts administered by the Commission,
and which were designated as noted above, are hereby incorporated herein by
reference and made a part hereof with the same effect as if filed herewith.

                                      CO-18
<PAGE>


                                CMS ENERGY CORPORATION

         SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
                  YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003

<Table>
<Caption>
                                                                            CHARGED/
                                                BALANCE AT                  ACCRUED                    BALANCE
                                                BEGINNING      CHARGED      TO OTHER                   AT END
DESCRIPTION                                     OF PERIOD     TO EXPENSE    ACCOUNTS    DEDUCTIONS    OF PERIOD
-----------                                     ----------    ----------    --------    ----------    ---------
                                                                         (IN MILLIONS)
<S>                                             <C>           <C>           <C>         <C>           <C>
Accumulated provision for uncollectible
  accounts:
  2005......................................       $38           $23           $--         $30           $31
  2004......................................       $40           $19           $--         $21           $38
  2003......................................       $23           $28           $4          $15           $40
</Table>

                                      CO-19
<PAGE>

                                      CONSUMERS ENERGY COMPANY

         SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
                  YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003

<Table>
<Caption>
                                                                            CHARGED/
                                                BALANCE AT                  ACCRUED                    BALANCE
                                                BEGINNING      CHARGED      TO OTHER                   AT END
DESCRIPTION                                     OF PERIOD     TO EXPENSE    ACCOUNTS    DEDUCTIONS    OF PERIOD
-----------                                     ----------    ----------    --------    ----------    ---------
                                                                         (IN MILLIONS)
<S>                                             <C>           <C>           <C>         <C>           <C>
Accumulated provision for uncollectible
  accounts:
  2005......................................       $10           $24           $--         $21           $13
  2004......................................       $ 8           $20           $--         $18           $10
  2003......................................       $ 5           $21           $--         $18           $ 8
</Table>

                                      CO-20
<PAGE>

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, CMS Energy Corporation has duly caused this Annual Report
to be signed on its behalf by the undersigned, thereunto duly authorized, on the
24th day of February 2006.

                                          CMS ENERGY CORPORATION

                                          By         /s/ DAVID W. JOOS
                                            ------------------------------------
                                                       David W. Joos
                                               President and Chief Executive
                                                           Officer

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report has been signed below by the following persons on behalf of CMS
Energy Corporation and in the capacities and on the 24th day of February 2006.

<Table>
<Caption>
                              SIGNATURE                                          TITLE
                              ---------                                          -----
<S>      <C>                                                   <C>

   (i)   Principal executive officer:

                          /s/ DAVID W. JOOS                      President and Chief Executive Officer
         ---------------------------------------------------
                            David W. Joos


  (ii)   Principal financial officer:

                         /s/ THOMAS J. WEBB                           Executive Vice President and
         ---------------------------------------------------            Chief Financial Officer
                           Thomas J. Webb


 (iii)   Controller or principal accounting officer:

                         /s/ GLENN P. BARBA                          Vice President, Controller and
         ---------------------------------------------------            Chief Accounting Officer
                           Glenn P. Barba

  (iv)   A majority of the Directors including those named
         above:

                                  *                                             Director
         ---------------------------------------------------
                          Merribel S. Ayres


                                  *                                             Director
         ---------------------------------------------------
                           Jon E. Barfield


                                  *                                             Director
         ---------------------------------------------------
                          Richard M. Gabrys


                                  *                                             Director
         ---------------------------------------------------
                           Earl D. Holton


                                  *                                             Director
         ---------------------------------------------------
                            David W. Joos


                                  *                                             Director
         ---------------------------------------------------
                       Philip R. Lochner, Jr.
</Table>

                                      CO-21
<PAGE>

<Table>
<Caption>
                              SIGNATURE                                          TITLE
                              ---------                                          -----

<S>      <C>                                                   <C>

                                  *                                             Director
         ---------------------------------------------------
                         Michael T. Monahan


                                  *                                             Director
         ---------------------------------------------------
                       Joseph F. Paquette, Jr.


                                  *                                             Director
         ---------------------------------------------------
                           Percy A. Pierre


                                  *                                             Director
         ---------------------------------------------------
                        S. Kinnie Smith, Jr.


                                  *                                             Director
         ---------------------------------------------------
                           Kenneth L. Way


                                  *                                             Director
         ---------------------------------------------------
                           Kenneth Whipple


                                  *                                             Director
         ---------------------------------------------------
                          John B. Yasinsky


  *By:                   /s/ THOMAS J. WEBB
         ---------------------------------------------------
                  Thomas J. Webb, Attorney-in-Fact
</Table>

                                      CO-22
<PAGE>

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Consumers Energy Company has duly caused this Annual
Report to be signed on its behalf by the undersigned, thereunto duly authorized,
on the 24th day of February 2006.

                                          CONSUMERS ENERGY COMPANY

                                          By         /s/ DAVID W. JOOS
                                            ------------------------------------
                                                       David W. Joos
                                                  Chief Executive Officer

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report has been signed below by the following persons on behalf of
Consumers Energy Company and in the capacities and on the 24th day of February
2006.

<Table>
<Caption>
                              SIGNATURE                                          TITLE
                              ---------                                          -----
<S>      <C>                                                   <C>

   (i)   Principal executive officer:

                          /s/ DAVID W. JOOS                             Chief Executive Officer
         ---------------------------------------------------
                            David W. Joos


  (ii)   Principal financial officer:

                         /s/ THOMAS J. WEBB                           Executive Vice President and
         ---------------------------------------------------            Chief Financial Officer
                           Thomas J. Webb


 (iii)   Controller or principal accounting officer:

                         /s/ GLENN P. BARBA                          Vice President, Controller and
         ---------------------------------------------------            Chief Accounting Officer
                           Glenn P. Barba

  (iv)   A majority of the Directors including those named
         above:

                                  *                                             Director
         ---------------------------------------------------
                          Merribel S. Ayres


                                  *                                             Director
         ---------------------------------------------------
                           Jon E. Barfield


                                  *                                             Director
         ---------------------------------------------------
                          Richard M. Gabrys


                                  *                                             Director
         ---------------------------------------------------
                           Earl D. Holton


                                  *                                             Director
         ---------------------------------------------------
                            David W. Joos


                                  *                                             Director
         ---------------------------------------------------
                       Philip R. Lochner, Jr.
</Table>

                                      CO-23
<PAGE>

<Table>
<Caption>
                              SIGNATURE                                          TITLE
                              ---------                                          -----

<S>      <C>                                                   <C>

                                  *                                             Director
         ---------------------------------------------------
                         Michael T. Monahan


                                  *                                             Director
         ---------------------------------------------------
                       Joseph F. Paquette, Jr.


                                  *                                             Director
         ---------------------------------------------------
                           Percy A. Pierre


                                  *                                             Director
         ---------------------------------------------------
                        S. Kinnie Smith, Jr.


                                  *                                             Director
         ---------------------------------------------------
                           Kenneth L. Way


                                  *                                             Director
         ---------------------------------------------------
                           Kenneth Whipple


                                  *                                             Director
         ---------------------------------------------------
                          John B. Yasinsky


  *By:                   /s/ THOMAS J. WEBB
         ---------------------------------------------------
                  Thomas J. Webb, Attorney-in-Fact
</Table>

                                      CO-24
<PAGE>

                   CMS ENERGY'S AND CONSUMERS' EXHIBIT INDEX

<Table>
<Caption>
EXHIBITS                                DESCRIPTION
--------                                -----------
<S>       <C>   <C>
(10)(e)   --    103(rd) Supplemental Indenture to the Indenture dated as of
                September 1, 1945 between Consumers and Chemical Bank
                (successor to Manufacturers Hanover Trust Company), as
                Trustee
(12)(a)   --    Statement regarding computation of CMS Energy's Ratio of
                Earnings to Fixed Charges and Preferred Dividends
(12)(b)   --    Statement regarding computation of Consumers' Ratio of
                Earnings to Fixed Charges and Preferred Dividends and
                Distributions
(21)      --    Subsidiaries of CMS Energy and Consumers
(23)(a)   --    Consent of Ernst & Young LLP for CMS Energy
(23)(b)   --    Consent of PricewaterhouseCoopers LLP for CMS Energy re: MCV
(23)(c)   --    Consent of Ernst & Young for CMS Energy re: Jorf Lasfar
(23)(d)   --    Consent of Price Waterhouse for CMS Energy re: Jorf Lasfar
(23)(e)   --    Consent of Ernst & Young LLP for Consumers
(23)(f)   --    Consent of PricewaterhouseCoopers LLP for Consumers re: MCV
(24)(a)   --    Power of Attorney for CMS Energy
(24)(b)   --    Power of Attorney for Consumers
(31)(a)   --    CMS Energy's certification of the CEO pursuant to Section
                302 of the Sarbanes-Oxley Act of 2002
(31)(b)   --    CMS Energy's certification of the CFO pursuant to Section
                302 of the Sarbanes-Oxley Act of 2002
(31)(c)   --    Consumers' certification of the CEO pursuant to Section 302
                of the Sarbanes-Oxley Act of 2002
(31)(d)   --    Consumers' certification of the CFO pursuant to Section 302
                of the Sarbanes-Oxley Act of 2002
(32)(a)   --    CMS Energy's certifications pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002
(32)(b)   --    Consumers' certifications pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002
(99)(a)   --    Financial Statements for Midland Cogeneration Venture
                Limited Partnership for the years ended December 31, 2001,
                2002 and 2003
(99)(b)   --    Financial Statements for Jorf Lasfar for the years ended
                December 31, 2003, 2004, and 2005
</Table>